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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
MERIT MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Utah 0-18592 87-0447695
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1600 West Merit Parkway
South Jordan, Utah 84095
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 253-1600
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on the
NASDAQ National Market System on March 28, 2001, was approximately $48,274,801.
Shares of Common Stock held by each officer and director and by each person who
may be deemed to be an affiliate have been excluded.
As of March 28, 2001 the Registrant had 7,801,988 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
Parts II, III and IV of this Report: the Registrant's definitive Proxy Statement
relating to the Annual Meeting of Shareholders scheduled for May 23, 2001 (Part
III).
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TABLE OF CONTENTS
PART I................................................................................................. 1
Disclosure regarding forward-looking statements.................................................................. 1
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Item 1. Business............................................................................................... 1
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GENERAL ............................................................................................... 1
PRODUCTS............................................................................................... 2
Inflation Devices.............................................................................. 2
Control Syringes............................................................................... 3
Specialty Syringes............................................................................. 3
High Pressure Contrast Injection Line and Sherlock Connectors.................................. 3
Manifolds...................................................................................... 3
Waste Containment Systems...................................................................... 4
Hemostasis Valves.............................................................................. 4
Torque Device.................................................................................. 4
Marquis Series Stopcock........................................................................ 4
Contrast Management Systems.................................................................... 4
Majestik Angiographic Needles.................................................................. 4
Fountain Infusion Catheter..................................................................... 4
Tomcat (PTCA) Guide Wire ...................................................................... 4
Squirt Wound Irrigation ....................................................................... 4
Angiography Pigtail Catheter .................................................................. 4
Pericardiocentesis............................................................................. 4
Meritrans Pressure Transducers ................................................................ 5
ShortStop ..................................................................................... 5
Custom Kits.................................................................................... 5
Diagnostic Cardiology Catheters ............................................................... 5
Diagnostic Radiology Catheters................................................................. 5
Vessel-Sizing Catheters ....................................................................... 5
Percutaneous Sheath Introducers................................................................ 5
Diagnostic Guide Wires......................................................................... 5
Guide Catheters................................................................................ 5
MARKETING AND SALES............................................................................ 5
Market Strategy................................................................................ 5
U.S. Sales..................................................................................... 6
International Sales............................................................................ 6
CUSTOMERS.............................................................................................. 6
RESEARCH AND DEVELOPMENT............................................................................... 7
MANUFACTURING.......................................................................................... 7
COMPETITION............................................................................................ 7
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS...................................... 8
REGULATION............................................................................................. 9
EMPLOYEES.............................................................................................. 9
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES................................................................................. 9
Item 2. Properties............................................................................................. 9
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Item 3. Legal Proceedings..................................................................................... 10
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Item 4. Submission of Matters to a Vote of Security Holders................................................... 10
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PART II ...................................................................................................... 11
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.................................. 11
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Item 6. Selected Financial Data............................................................................... 11
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 12
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk ............................................. 14
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(Continued)
Item 8. Financial Statements and Supplementary Data........................................................... 15
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Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure..................... 37
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PART III ...................................................................................................... 37
Items 10, 11, 12 and 13......................................................................................... 37
PART IV ...................................................................................................... 37
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................... 37
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SIGNATURES...................................................................................................... 39
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PART I
DISCLOSURE REGARDING FORWARD -LOOKING STATEMENTS
This Report includes "Forward-Looking Statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact are "Forward-Looking Statements" for purposes of
these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or services,
any statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. All Forward- Looking
Statements included in this document are made as of the date hereof and are
based on information available to Merit as of such date. Merit assumes no
obligation to update any Forward-Looking Statement. In some cases,
Forward-Looking Statements can be identified by the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "intends" or "believes,"
"estimates," "potential," or "continue," or the negative thereof or other
comparable terminology. Although the Company believes that the expectations
reflected in the Forward-Looking Statements contained herein are reasonable,
there can be no assurance that such expectations or any of the Forward- Looking
Statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the Forward-Looking Statements. Future
financial condition and results of operations, as well as any Forward- Looking
Statements are subject to inherent risks and uncertainties, including market
acceptance of the Company's products, product introductions potential product
recalls, delays in obtaining regulatory approvals, cost increases, fluctuations
in and obsolescence of inventory, price and product competition, availability of
labor and materials, development of new products and techniques that render the
Company's products obsolete, foreign currency fluctuations, changes in health
care markets related to health care reform initiatives and other factors
referred to in the Company's press releases and reports filed with the
Securities and Exchange Commission. All subsequent Forward- Looking Statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by these cautionary statements.
Item 1. Business.
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GENERAL
Merit Medical Systems, Inc. (the "Company") was formed in 1987 by
members of its current management for the purpose of producing single-use
medical products of high quality and superior value primarily for use in
diagnosis and treatment of cardiovascular disease. The Company's products are
designed to provide physicians and other health care professionals with devices
that enable them to perform interventional and diagnostic procedures safely and
effectively. Initially, the Company's expertise in product design and its
proprietary technology and skills in injection and insert molding enabled it to
introduce innovative new products and capture significant market share. The
Company subsequently combined its plastics molding capability with the
application of proprietary electronics and sensor-based technologies to develop
a line of angioplasty inflation products with electronic sensing and display
features. These devices are now included in a group of sensor-based products
that address a broad range of needs related to diagnostic and interventional
catheterization procedures performed in hospitals. Since 1997 the Company has
expanded its product offerings to include catheters, guide wires, sheath
introducers, needles and drug infusion devices.
The Company's strategy is to offer a broad line of innovative,
disposable products for diagnosis and intervention in radiology and cardiology.
Merit continues to increase market acceptance and penetration for both its
existing and new products in the U.S. and in international markets. Longer term,
the Company's strategy is to extend the application of its sensor-based
technologies, plastics molding, catheter, guide wire, and electronic
capabilities and to develop products for diagnostic and interventional
procedures in additional markets such as neuroradiology, nephrology, pain
management and critical care. The Company's sales of stand-alone products in
combination with custom kits have increased as additions have been made to the
Company's product lines. In 2000, approximately 53% of the Company's sales were
made directly to U.S. hospitals and approximately 22% of sales were made to
custom packagers, distributors and O.E.M. companies who also distribute to U.S.
hospitals. Approximately 25% of the Company's sales in 2000 were made in
international markets.
1
The Company was organized in July 1987 as a Utah corporation. In July
1994, the Company purchased a controlling interest in Sentir, Inc., a
California-based manufacturer of silicon sensors, ("Sentir") and during 1999 the
Company purchased the remaining interest. The Company also has established
subsidiaries in Ireland, Germany, France, the United Kingdom, Belgium, and in
the case of Sentir, the Netherlands to conduct its international business. On
January 31, 1997, the Company purchased the operating assets and product lines
of Universal Medical Instruments Corp. ("UMI"). On August 20, 1999 the Company
purchased the operating assets and product lines of the Angleton Texas division
of Mallinckrodt Inc. ("Mallinckrodt"). The Company's principal offices are
located in a manufacturing and office facility at 1600 West Merit Parkway, South
Jordan, Utah 84095, and its telephone number is (801) 253-1600.
See "Item 2. Properties."
PRODUCTS
The Company's products have been designed and developed in response to
the needs of customers and patients. These needs have been identified primarily
through observation of procedures in the cardiac catheterization and radiology
laboratories, consultation with the Company's medical advisors and consultants
and through direct communication with customers. Since 1988, the Company has
developed and introduced several product lines, including control syringes
(CCS(TM)and Smart Tip(TM)), inflation devices (Intellisystem(R) Monarch(R),
Basix(TM), and basixCOMPAK(TM) including new 25-atmosphere versions), specialty
syringes (Medallion(R),and VacLok(R)), high-pressure tubing and connectors
(Excite(TM), flexible, braided, rigid, pvc, and Sherlock(TM)) , waste handling
and disposal products (Merit Disposal Depot(R) and Backstop(R)), a disposable
blood pressure transducer (Meritrans(R)), disposable hemostasis valves (MBA(TM),
Passage(R), Access-9,(TM) Access Plus(TM), Double-Play(TM) and Inspector(TM)),
manifolds and stopcocks (Marquis(R) Series), a torque device, contrast
management systems (Miser(R) and In-Line Contrast Management System(TM)),
angiography needles (Majestik(R) Series), blood containment devices (Captiva(R)
), pericardiocentesis catheters and procedure trays, PTCA guide wires (TomCat(R)
) and extension wires, thrombolytic infusion catheters (Fountain(R) and
Mistique(TM)) and accessories (Squirt(TM)), diagnostic angiographic pigtail
catheters, and diagnostic cardiology and radiology catheters, (SofTouch(R) and
Performa(R), sheath introducers (DialEase(TM)) and diagnostic guide wires,
RadStat(TM) and BackStop(TM). These products are sold separately and in custom
kits consisting primarily of selected combinations of products.
The Company has not experienced any product liability claims; however,
the sale and use of its products entails an inherent risk that product liability
claims may be asserted against the Company. The Company maintains product
liability insurance in the amount of $5,000,000 per occurrence and in the
aggregate, which may not be adequate for expenses or liabilities actually
incurred.
Inflation Devices. Inflation devices are large, specialized syringes
used in interventional catheterization procedures to inflate and deflate
balloon-tipped catheters. The Company has received 510(k) approval from the U.S.
Food and Drug Administration ("the FDA") for use of its digital inflation
devices for a wide range of additional clinical applications such as
discography, esophageal dilitation, trigeminal nerve compression, and retinal
detachment. Each of the Company's inflation devices and universal fluid
dispensing syringes incorporates patented, proprietary design features which
contribute to ease of use, including allowing the clinicians to engage or
release the syringe plunger with one hand while increasing or decreasing the
pressure. Each syringe also provides a clear view of the fluid path that
simplifies debubbling and contributes to accurate measurement of pressure.
The Company's IntelliSystem(R) 25 inflation device, which was the
first such device to incorporate electronic sensing and display features,
consists of a disposable 20cc inflation syringe and an integral pressure
transducer which connects to an electronic monitor outside of the sterile field.
To aid the marketing process and encourage use of the Company's products, the
electronic monitor is provided without charge to large volume customers using
the IntelliSystem. The IntelliSystem measures, times, records and digitally
displays information concerning the pressure, duration and number of each
inflation and deflation of the angioplasty balloon. When used in other clinical
applications such as discography, the Intellisystem accurately dispenses fluid
while documenting and graphing pressures in the disc. The Company believes that
electronic sensing and display of such information is much more accurate and
precise than that which can be obtained from conventional analog gauges. The
data is stored and may be displayed, retrieved, graphed and printed.
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The patented IntelliSystem II color monitor is the most advanced on
the market and gives physicians several highly desirable options. These include
a large, touch screen and display, an instant display of positive and negative
pressures and enlarged graphing display to show extremely subtle changes in
pressure measurements. In addition the display and readouts are available in
four languages by touching the screen. Merit is the only company with digital
technology sensitive enough to show minute changes in pressure.
The Monarch 25 is a disposable inflation device which digitally
displays data concerning pressure and duration of inflations and deflations on a
small electronic monitor mounted on the barrel of the inflation syringe. The
monitor does not offer all of the same display, storage or printing capabilities
of the IntelliSystem & IntelliSystem II but offers the convenience of portable
operation.
The Basix(R) 25 and the new BasixCOMPAK are disposable inflation
devices which incorporate a conventional analog pressure gauge mounted on the
barrel of the inflation syringe. The Basix more closely resembles devices
marketed by the Company's competitors but includes the Company's proprietary
design features and benefits. The Company believes that the Basix and
BasixCOMPAK represent a significant addition to its line of inflation devices
that will contribute to sales where both clinical and economic outcomes are a
priority.
Control Syringes. The Company's disposable control syringes are
utilized for one-handed control of the injection of contrast media and other
fluids during angiography, angioplasty and stent placement. The control syringes
are molded from polycarbonate material which is stronger than glass and other
plastics used in the industry. The Company offers different models and sizes of
the control syringes with varying features, according to physician preference.
These features include different configurations of syringe handles, plungers and
connectors which allow operation of the syringe in a fixed or rotating position
and varying volume sizes, including a popular 8ml mode, Inject8(TM). (In
response to customer demand, Merit launched latex-free control syringes in
1998).
Specialty Syringes. Merit's Medallion syringes, a line of disposable,
latex-free, color-coded specialty syringes are used for injection of
medications, flushing of manifolds and other general purposes. These syringes
are molded of polycarbonate material for added strength and are available in
hundreds of sizes, colors and custom printing combinations. The color coding
allows a clinician to assign a color for each medication to be dispensed and to
differentiate syringes by their contents. The syringes can also be custom
printed to the specifications of the user. In response to customer requests, the
Company has developed and added additional sizes of its specialty syringes which
have applications in dispensing various medications required in a broader range
of peripheral procedures. The Company believes that the design, color coding and
materials used in its specialty syringes contribute to patient safety and more
efficient procedures. The specialty syringes are sold separately and are an
important component of the Company's custom kits.
High-Pressure Contrast Injection Line and Sherlock Connectors. During
angiographic and diagnostic radiology procedures, contrast media must be
injected through a catheter into the blood vessel. This is sometimes
accomplished by a mechanical injector which can generate pressures up to 1200
pounds per square inch ("psi"), and requires tubing that can withstand these
pressures. The Company offers high-pressure, specialty tubing with proprietary
Sherlock connectors. In 1998 the Company launched Excite(TM), a new line of
clear, flexible high-pressure tubing that combines the features of tubing
clarity and strength. Sherlock connectors allow coupling and uncoupling of
tubing with injectors, syringes and manifolds without over-tightening or
breakage. The Company is currently offering specialty tubing that can handle
pressures ranging from 500 to 1200 psi. The specialty tubing with Sherlock
connectors is an important component of custom kits.
Manifolds. The administration of saline, imaging and contrast fluids
and the management of blood-pressure monitoring, fluid injection and waste
collection in angiography or angioplasty procedures is accomplished through a
series of valves on a manifold which control the flow of various fluids in
different directions. The Company has designed its own manifold consisting of
two, three, four or five valves. The Company believes its manifold offers
greater ease of use, simplified identification of flow direction and leak-free
operation under the pressures of manual or mechanical injection of fluids when
compared to manifolds sold by competitors. The Merit Manifold is sold separately
but is also a key component of the Company's custom kits.
3
Waste Containment Systems. Because of heightened awareness of the
risks associated with blood and related waste materials, hospitals have moved
toward closed systems whenever possible. To address these concerns, the Company
has designed a waste containment bag which connects to a manifold and collects
waste materials such as blood and other fluids during angiography, angioplasty
or other procedures. The Merit Disposal Depot(TM) is self-contained for ease of
disposal and reduces risk of contamination. The Backstop(TM) is a unique and
proprietary alternative fluid disposal basin designed to reduce exposure to
blood-borne pathogens.
Hemostasis Valves. The MBA, Passage, Access 9, Access Plus,
Double-Play, and Inspector hemostasis valves are used in conjunction with the
Company's inflation devices and as a component of the Company's angioplasty
packs. These valves are made of polycarbonate plastic for clarity and include
Sherlock connectors. The devices differ in size and function. The MBA features a
valve mechanism that minimizes blood loss during exchange of wires, catheters
and other tools through the valve.
Torque Device. The Merit torque device is a guide wire steering tool
with a tapered design and contrasting colors for improved visibility. The torque
device typically is included as a component of the Company's angioplasty packs.
Marquis(TM) Series Stopcock. The Company's Marquis Series Stopcock
offers improvements to competitive stopcock devices, including a large, easy
grip handle. The Marquis Series Stopcock is used in connection with Sherlock
connectors to provide improved connections during procedures.
Contrast Management Systems. The Miser(TM) and the In-Line Contrast
Management System have been designed to increase catheterization lab
efficiencies by reducing contrast media waste.
Majestik(TM) Angiographic Needles. The angiography needle creates the
percutaneous (through the skin) access site for all angiography and angioplasty
procedures. This site is the point of entry for the introducer sheath, guide
wires, catheters and any other interventional devices. The Merit Majestik Needle
helps the physician achieve precision vascular access with one of the sharpest
angiography needles on the market.
Fountain(TM) Infusion Catheter. The Fountain catheter delivers
therapeutic solutions to dissolve blood clots (thrombi) in peripheral vessels.
This catheter is used to treat peripheral arterial occlusions, hemodialysis
graft occlusions, and deep vein thrombosis. This product incorporates the
Squirt(TM) fluid dispensing system for controlled fluid delivery.
Tomcat(TM) (PTCA) Guide Wire. Tomcat guide wires are used in
percutaneous transluminal coronary angioplasty (PTCA) and stent deployment
procedures. Guide wires are used to guide and place balloon angioplasty and
stent deployment catheters into coronary arteries. This product complements our
existing lines of inflation devices and accessories currently used in balloon
angioplasty procedures and was designed, developed and manufactured in the
Company's Ireland facility.
Squirt Wound Irrigation. In any traumatic wound, the risk of infection
is greatly decreased by the removal of bacteria and foreign matter from the
site. Merit launched a line of Squirt wound irrigation products in 1998 designed
for the emergency room to deliver large volumes of irrigation fluid. The product
features a proprietary, one-handed Squirt fluid delivery syringe, an adjustable
nozzle and splash protecting shield.
Angiography Pigtail Catheter. In 1997 Merit acquired new product lines
and technologies from UMI, a small specialty medical manufacturing firm in
upstate New York. At that time the Company began marketing a new line of
thin-wall, FEP (Teflon), high-flow, pigtail angiographic catheters ideally
suited for smaller patients.
Pericardiocentesis. Merit offers a complete pericardiocentesis kit
which combines a high-flow drainage catheter and virtually all components needed
to place the device in the pericardial sack. This combination saves the
physician both time and money by having all components in one convenient tray.
On occasion, the sack surrounding the heart becomes filled with blood or fluid.
4
To remove the fluid and the potential for cardiac tamponade, a catheter is
placed in the pericardial sack. The Company designed, manufactured and launched
two proprietary kits (pigtail and straight) including the catheter and necessary
components to perform the procedure.
Meritrans(TM) Pressure Transducers. Diagnostic blood pressure
monitoring is a clinical priority in virtually all diagnostic and interventional
procedures. The Meritrans provides clinicians with reliable and precise
blood-pressure measurement. The clear, flow-through design makes flushing and
debubbling simple and safe. The transducer is a critical component in many
custom kit configurations.
ShortStop(TM). In 2000, Merit introduced the ShortStop, a small
container with an adhesive base that fits on the back table in a clinical lab.
It is used for the temporary containment of needles, scalpels and other sharp
tools to and in the prevention of inadvertent needles sticks .
Custom Kits. Custom kits allow physicians to obtain the medical
devices and accessories they most frequently use during angiography, angioplasty
and similar procedures in a convenient, pre-packaged and pre-assembled form.
Custom kits also provide cost savings over purchasing single products and reduce
the hospital's administrative costs associated with maintaining an inventory of
individual, sterile products.
Diagnostic Cardiology Catheters. Cardiac catheterization is performed
to diagnose the nature, severity, and precise location of blockages and other
abnormalities of the heart. This technique represents the most essential
diagnostic tool in the management of patients with cardiovascular disease. The
Company manufactures and sells a complete line of diagnostic catheters used for
these procedures.
Diagnostic Radiology Catheters. Radiology catheters are engineered and
designed with distinct tip configurations to access specific vessels and organs
outside the heart (head, kidneys, etc). Merit acquired a strong radiology
catheter product portfolio from Mallickrodt's Angleton Division in 1999.
Vessel-Sizing Catheters. In 2000 Merit introduced a complete line of
vessel-sizing catheters, which are used by radiology physicians to measure the
internal diameter and length of a blood vessel under fluoroscopy. Procedures in
which these catheters are used include angioplasty, embolization, abnormal
aortic aneurysm (AAA) stent-grafts and vena cava filter placements. In the
fourth quarter, Merit introduced its most popular model, the 20-band version,
for use in measuring the aorta in a AAA stent-graft procedure.
Percutaneous Sheath Introducers. Sheaths are used to create the access
through which guide wires and catheters are passed into the vasculature. Most
sheaths incorporate a valve hub to minimize bleeding and a side port for drug
delivery. (The Company acquired the Performa line of sheath introducers from
Mallinckrodt in 1999).
Diagnostic Guide Wires. Guide wires are relatively simple, spring-type
products that provide the necessary firmness and control to advance catheters to
the site where angiograms will be taken. Guide wires vary in length, outside
diameter and tip configuration. The Company distributes an OEM guide wire made
to exact specifications.
Guide Catheters. Coronary angioplasty requires the use of a guiding
catheter to place the balloon within the arterial system. The catheter is
inserted through the sheath into the arterial system. Once in place, the guiding
catheter acts as a conduit for the guide wire, the dilating balloon catheter,
coronary stents and the radiopaque dye that is used to provide fluoroscopic
visualization during the procedure. The Mallinckrodt acquisition brought with it
a line of high- quality guide catheters used in cardiology. The Company intends
to dedicate resources to expand this offering.
MARKETING AND SALES
Market Strategy. The Company's marketing strategy is strongly focused
on identifying and introducing highly profitable, differentiated products that
meet customer needs. The Company has targeted selected hospital market segments
in cardiology and radiology where its products are used. Suggestions for new
products and product improvements may come from engineers, sales persons,
physicians and technicians who perform the clinical procedures.
5
When a product suggestion demonstrates sustainable competitive
advantage, meets customer needs, fits strategically and technologically, and has
good potential financial return, a "project team" is chartered with individuals
from the Company's marketing, engineering, manufacturing and quality assurance
departments . This team identifies the customer requirements, integrates the
design, compiles all necessary documentation and testing and prepares the
product for market introduction. The Company strongly believes that one of its
marketing strengths is its capacity to rapidly conceive, design, develop, and
introduce new products.
Cardiovascular disease is the number-one health problem in the U.S.
According to American Heart Association estimates, nearly 60 million Americans,
or approximately 25% of the population, has one or more types of the disease.
Cardiovascular disease accounts for an estimated one million deaths annually,
more than 40% of the U.S. total. Transcatheter modalities currently represent
the greatest potential to diagnose and treat the disease. The Company intends to
leverage its strong market position in both catheter technology and accessory
products to continue sales growth.
The global market for transcatheter products stands at a major
crossroad, even when considering the continued dynamic evolution in vascular
stent placement. Laser techniques have not demonstrated the success that was
expected in the last few years. The core diagnostic and therapeutic applications
for basic transcatheter technologies (balloons, stents and defect repair) are
well established, with the future growth of procedures and products dependent
upon demographic trends. This has not, however, prevented significant investment
of new technologies and applications designed to enhance patient outcomes and
enable the treatment of new populations that have been traditionally limited to
surgical intervention. The Company believes it is well positioned to monitor
these trends and launch catheters and accessories to support growing clinical
applications.
There are a large number of projects focused on improving the
diagnosis of cardiovascular disease, solving the issue of restenosis and other
less invasive alternatives to open-heart surgery. In recent years researchers
have focused their interests on technologies and products that support the
growth of transcatheter approaches to reducing the morbidity and mortality of
cardiovascular disease, including: radiated stents and balloons, anti-platelet
therapy, gene therapy, percutaneous coronary thrombectomy and transmyocardial
revascularization. One area of specific interest to the Company is transradial
catheterization. The Company will continue to develop and launch innovative
products to support these clinical trends.
U.S. Sales. The Company's direct sales force currently consists of a
vice president of sales, two executive sales managers, five regional sales
managers and 46 direct sales representatives located in major metropolitan areas
throughout the U.S. The Company's sales people are trained by Company personnel
at the Company's facilities, by a senior sales person in their respective
territories, at regular national and regional sales meetings by consulting
cardiologists and employees of the Company, and by observation of procedures in
catheterization laboratories.
International Sales. Outside of the U.S., the Company's products are
presently sold by 42 independent dealer organizations and 15 direct sales
representatives in Germany, France, the United Kingdom, Canada, Belgium,
Netherlands, and Ireland. In 2000, the Company's international sales grew by 26%
and accounted for approximately 25% of total sales. The Company has appointed a
vice president for international sales and established an international sales
and distribution office in Maastricht, The Netherlands. With the recent and
planned additions to its product lines, the Company believes that international
sales will continue to increase.
International dealers are required to inventory products and sell
directly to customers within defined sales territories. Each of the Company's
products must be approved for sale under the laws of the country in which it is
sold. International dealers are responsible for compliance with all applicable
laws and regulations in their respective countries.
CUSTOMERS
The Company serves hospital-based cardiologists, radiologists,
anesthesiologists, physiatrists (pain management), neurologists, ER physicians,
technicians and nurses who influence the purchasing decision for Merit's
products. Hospitals also purchase the Company's products in the U.S. through
custom packagers and packers who assemble and combine products in custom kits
6
and packs. The Company's customers outside the U.S. are hospitals and other end
users in those countries where a direct sales force has been established, and in
other countries are independent dealers in medical products who resell to
hospitals and other customers.
In 2000, approximately 53% of the Company sales were made directly
to domestic hospitals, 22% to custom packagers and packers and 25% to
international markets. Sales to the Company's single largest customer, a foreign
dealer, accounted for 6.0% of total sales during the year ended December 31,
2000. Merit manufactures products for other medical device companys through its
OEM program. In 2000, OEM sales represented 5.4% of Merit's total revenue. The
Company is investing heavily in people and programs to expand the OEM business.
Merit recognizes the growth opportunity in this area.
RESEARCH AND DEVELOPMENT
The Company believes that one of its important strengths is its
ability to quickly adapt its expertise and experience in injection molding and
to apply its electronic and sensor technologies to a perceived need for a new
product or product improvement. The Company's development efforts are presently
focused on disposable, innovative single-patient or single-use items which can
be included in the Company's custom kits or sold separately. Longer-term
projects include use of sensor-based technologies in a variety of applications
and additional inflation devices with added capacities and features. There is a
new focus on interventional vascular access products, such as needles, guide
wires, and catheters. Certain of the Company's executive officers also devote a
substantial portion of their time to research and development. Research and
development expenses were $3,864,171, $3,618,041 and $3,244,477 in 2000, 1999
and 1998, respectively. There was no customer-sponsored research and
development. The Company anticipates that its research and developement expenses
will range between approximately 4.0% and 5% of net sales for 2001.
MANUFACTURING
Many of the Company's products are manufactured utilizing its
proprietary technology and expertise in plastic injection and insert molding.
Tooling of molds is contracted with third parties, but the Company designs and
owns all of its molds. The Company utilizes its experience in injection and
insert molding technologies in the manufacture of most of the custom components
used in its products.
The electronic monitors and sensors used in the Company's
IntelliSystem and Monarch inflation devices are assembled from standard
electronic components or purchased from suppliers. (In July 1994, the Company
acquired a 73% interest and in August 1999 the Company acquired the remaining
interest in Sentir, which is engaged in development and marketing of silicon
sensors. Sentir is presently providing virtually all of the sensors utilized by
the Company in its digital inflation devices).
The Company's products are manufactured at several facilities including
South Jordan, Utah; Galway, Ireland; Angleton, Texas and a leased expansion
facility in Murray, Utah. See "Item 2. Properties."
COMPETITION
The principal competitive factors in the markets in which the
Company's products are sold are quality, performance, service and price. The
Company believes that its products have achieved rapid market acceptance due, in
part, to the quality of materials and workmanship, innovative design and ease of
operation, and the Company's prompt attention to customer inquiries. The
Company's products are priced competitively, but generally not below prices for
competing products.
There are several companies which are in the business of designing,
manufacturing and marketing devices similar to the Company's products, most of
which have substantially greater financial, technical and marketing resources
than the Company. The Company believes, based on available industry data with
respect to the number of procedures performed, that it is one of two market
leaders in the U.S. for control syringes, tubing and manifold kits (together
7
with NAMIC USA Corporation, a subsidiary of Boston Scientific), and is the
leader in the U.S. market for inflation devices and hemostasis accessories. The
Company also believes that the recent and planned additions to its product lines
will enable it to compete more effectively in both U.S. and international
markets. The Company's new IntelliSystem(R) II color monitor provides
considerable improvements, including sensitivity, in existing digital
technology. The Company is the only provider of digital inflation technology in
the world. There is no assurance, however, that the Company will be able to
maintain its existing competitive advantages or to compete successfully in the
future.
A substantial majority of the Company's revenues are presently derived
from sales of products used in coronary angiography and angioplasty procedures.
Other procedures, devices and drugs for the treatment and prevention of coronary
artery disease have been developed and are currently being used such as laser
angioplasty, atherectomy procedures and drug therapies, the effect of which may
be to render certain of the Company's products obsolete or to limit the markets
for its products. However, with the advent of vascular stents and other
procedures such as discography, the Company has experienced continued growth in
its proprietary inflation technology. The radiology and cardiology markets
encompass a large number of suppliers of many different sizes. The Company
competes with small firms, such as Possis Medical and Microtherapeutics;
medium-sized companies like Cook, Arrow and Angio Dynamics; and large,
international, multi-supply medical companies, such as Johnson & Johnson, Boston
Scientific, Guidant, Medtronic and C.R. Bard.
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS
The Company considers its proprietary technology to be important in
the development and manufacture of its products and seeks to protect its
technology through a combination of patents and confidentiality agreements with
its employees and others. Two U.S. patents were issued in 1991 covering the
mechanical aspects of the Company's angioplasty inflation devices which relate
to the ability of the user to engage or release the syringe plunger while
increasing or decreasing pressure, and two U.S. patents were obtained in 1992
and 1993 covering digital control aspects of the Company's IntelliSystem
inflation device and for displaying, storing and retrieving inflation data. The
Company has obtained other patents covering each of its Monarch and Basix
inflation devices and additional features of the IntelliSystem.
Corresponding patent applications covering the claims included in the
Company's U.S. patents and patent applications have been initiated in several
foreign countries. The Company deems its patents and patents pending to be
materially important to its business but does not believe its business is
dependent on securing such patents. The Company negotiated a license in 1992
with respect to patents concerning technology utilized in its IntelliSystem and
Monarch inflation devices in consideration of a 5.75% ongoing royalty, not to
exceed $450,000 annually. Royalties paid in each of 2000, 1999 and 1998 were
$450,000.
While the Company has obtained U.S. patents and filed additional U.S.
and foreign patent applications as discussed above, there can be no assurance
that issued patents will provide the Company with any significant competitive
advantages or will not be challenged by third parties or that the patents of
others will not have an adverse effect on the ability of the Company to conduct
its business. The Company could incur substantial costs in seeking enforcement
of its patents against infringement or the unauthorized use of its proprietary
technology by others or in defending itself against similar claims of others.
Insofar as the Company relies on trade secrets and proprietary know-how to
maintain its competitive position, there can be no assurance that others may not
independently develop similar or superior technologies.
The Company has registered or applied for registration of several
tradenames or trademarks. See "Products." (Page 2). The Company also places
copyright notices on its instructional and advertising materials and has
registered copyrights relating to certain software used in its electronic
inflation devices.
8
REGULATION
The development, testing, packaging, labeling and marketing of medical
devices and the manufacturing procedures relating to these devices are regulated
under the Federal Food, Drug and Cosmetic Act and additional regulations
promulgated thereunder by the FDA. In general, these statutes and regulations
require that manufacturers adhere to certain standards designed to ensure the
safety and effectiveness of medical devices. The Company employs a director of
regulatory affairs who is responsible for compliance with all applicable FDA
regulations. Although the Company believes it is currently in material
compliance with all applicable FDA requirements, the Company's business could be
adversely affected by failure to comply with all applicable FDA and other
government regulations presently existing or promulgated in the future.
The FDA's Good Manufacturing Practices standards regulate the
Company's manufacturing processes, require the maintenance of certain records
and provide for unscheduled inspections of the Company's facilities. Certain
requirements of state, local and foreign governments must also be complied with
in the manufacture and marketing of the Company's products.
New medical devices may also be subject to either the Section 510(k)
Pre-Market Notification regulations or the Pre-Market Approval ("PMA")
regulations of the FDA and similar regulatory authorities in foreign countries.
New products in either category require extensive documentation, careful
engineering and manufacturing controls to ensure quality. Products needing PMA
approval require extensive pre-clinical and clinical testing and clearance by
the FDA prior to marketing. Products subject to the Section 510(k) regulations
require FDA clearance prior to marketing. To date, the Company's products have
required only compliance with the Section 510(k) regulations. The Company's
products are subject to foreign regulatory approvals before they may be marketed
abroad. The Company places the "CE" mark on devices and products sold in Europe.
The Company has received ISO 9001 certification for its South Jordan facility,
as well ISO 9002 certification for its Galway, Ireland facility.
EMPLOYEES
As of March 20, 2001, the Company employed 1,038 persons, including
800 in manufacturing, 101 in sales and marketing, 66 in engineering, research
and development and 71 in administration.
Many of the Company's present employees are highly skilled. The
Company's failure or success will depend, in part, upon its ability to retain
such employees. Management is of the opinion that an adequate supply of skilled
employees is available. The Company has from time to time experienced rapid
turnover among its entry level assembly workers as well as occasional shortages
of such workers, resulting in increased labor costs and administrative expenses
related to hiring and training of replacement and new entry-level employees. The
Company has confidentiality agreements with its key employees, including each of
its executive officers. None of the Company's employees is represented by a
union or other collective bargaining group and management of the Company
believes that its relations with its employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For financial information relating to the Company's foreign and
domestic sales, transfers between geographic areas, net income and identifiable
assets, see Note 9 to the Consolidated Financial Statements incorporated by
reference in this report.
Item 2. Properties.
-----------
The Company is the owner of approximately 35 acres of real property
situated in the City of South Jordan, Utah, which surrounds the site of its
175,000 square foot principal office and manufacturing facility where it
relocated and consolidated its operations in November 1994. The Company sold to
the developer ten acres of land on which the facility was constructed and
entered into a 25-year lease agreement to finance the new facility. Monthly
9
lease payments are approximately $122,000. The Company also holds an option to
purchase the facility, exercisable at market value after ten years and, if not
exercised, after 25 years. The new facility has been constructed to the
Company's specifications and is presently estimated to be estimated to be 80%
utilized.
The Company is leasing a building of approximately 26,500 square feet
in Galway, County Galway, Republic of Ireland as its principal office and
manufacturing facility for European operations. This facility is used as the
administrative headquarters to support the European direct sales force. The
facility also houses a research and development team which has developed a new
PTCA guide wire and is developing other new products. Beginning in the fourth
quarter of 1997, the Company initiated manufacturing operations for several new
and existing products at the Galway facility, including custom kits, the BASIX
inflation device and the Company's PTCA guide wire. In 1998 Merit began the
manufacture of the hemostasis valve products in Ireland. The property has been
improved and equipped on terms favorable to the Company in connection with
economic development grant incentives and grants provided by the Irish
Government. This lease is for 20 years at approximately $135,000 per year, less
a 40% subsidy from the Irish government, available through 2000. The Company
also has a purchase option exercisable on terms deemed favorable to the Company
through the term of the lease.
In October 1997, the Company began manufacturing operations in a
facility of approximately 25,000 square feet of manufacturing space formerly
occupied by the Company in Murray, Utah and shifted production of several well-
established products to this facility. In 1998 Merit added an additional 25,000
square feet of manufacturing space to its Murray location. The additional
manufacturing space was obtained to create room at the Company's principal
manufacturing facility for production of new products. The leases are for a term
of five years with monthly lease payments of approximately $27,000.
In August 1999, the Company purchased the operating assets of
Mallinckrodt's Angleton division, including approximately 19 acres of land and a
75,000 square feet building in Angleton, Texas.
The Company believes that its facilities are generally adequate for
its present level of operations and for anticipated increases in the level of
operations.
Item 3. Legal Proceedings.
------------------
In the course of business, the Company is involved in litigation and
claims which management believes will not have a materially adverse effect on
the Company's operations.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
10
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.
--------------------------------------------------------------------
The "Market Information" included in the Company's Annual Report to
Shareholders for the year ended December 31, 2000, furnished herewith to the
Commission as Exhibit 13.1 to this Report, is incorporated herein by reference.
Item 6. Selected Financial Data.
------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------- ------------------- --------------------- ----------
Operating Data:
Sales $91,447,512 $77,959,576 $68,377,357 $60,579,011 $50,455,766
Cost of Sales 60,823,459 47,917,815 42,433,873 37,766,116 29,319,617
Gross Profit 30,624,053 30,041,761 25,943,484 22,812,895 21,136,149
Selling, General
and Administrative
Expenses 23,300,352 20,406,927 17,528,002 15,726,651 14,311,049
Research and Develop-
ment Expenses 3,864,171 3,618,041 3,244,477 4,446,795 2,533,171
Severance Costs 330,975
Income from operations 3,128,555 6,016,793 5,171,005 2,639,449 4,291,929
Other Expense 2,354,710 1,255,364 880,659 863,933 661,777
Income Before Income
Tax Expense 773,845 4,761,429 4,290,346 1,775,516 3,630,152
Income Tax Benefit
(Expense) 52,712 (1,454,762) (1,687,379) (944,981) (1,277,431)
Minority Interest in Income
of Subsidiary 81,077 151,808 33,003 190,113
Net Income 826,557 3,225,590 2,451,159 797,532 2,162,608
Net Income Per Share $ 0.11 $ 0.43 $ 0.33 $ 0.11 $ 0.31
Weighted Average Shares
Outstanding (Diluted) 7,860,905 7,565,673 7,488,225 7,369,668 7,051,911
Balance Sheet Data:
Working Capital $32,447,007 $33,933,698 $15,779,725 $14,737,971 $12,761,211
Total Assets 71,446,631 72,360,469 50,664,786 45,269,678 41,718,553
Long-Term Debt 24,011,778 27,817,308 3,388,835 3,913,686 4,822,126
Stockholders' Equity $34,772,702 $32,690,136 $29,086,368 $25,802,149 $22,487,123
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
----------------------------------------------------------------------
OVERVIEW
The year 2000 has been a year of growth, challenges and transition
for the Company and its employees. The Company has added significantly to its
product offering through acquisition, internal development and a distribution
agreement. Merit has overcome some important challenges in its operations, with
a new integrated business management software system as a long-term foundation,
and is poised for many more improvements in capacities and efficiency than we've
seen to date. The Company is positioned to reap the benefits of a larger, stable
sales force with an expanded product offering.
The year 2000 has been a time for adjustment from excess inventory and
manufacturing capacity and their associated effects on margins. This past year
in Europe has continued to be difficult financially, particularly with the
dramatic rise of the dollar against the Euro and its negative effect on revenues
and gross margins for this sector of the business. In response the entire
organization has had a renewed focus on cost reduction and efficiency. While
sales grew 17% in 2000 the average head count declined by approximately 100, and
the inventory went down by $2.3 million while we added over $1 million in
inventory for new product introductions. The Company's line of credit balance
has declined from its high of $30.4 million on August 24, 2000 to approximately
$18.9 million on March 21, 2001. So while the Company must report a very
disappointing year in terms of margins and net income, it is also very
optimistic about what was accomplished this year and how Merit is positioned for
improvements in almost every area. There are still challenges to grow the top
line, to get new products to market, to get Europe's direct sales operations
profitable, and to balance the production capacities of the Angleton catheter
facility. Management believes that gross margins net income and cash flow are
all on their way up, and interest costs and tax rates are going to also be
favorable.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data as a percentage of sales:
2000 1999 1998
---- ---- ----
Sales 100.0% 100.0% 100.0%
Gross profit 33.5 38.5 37.9
Selling, general and administrative 25.5 26.2 25.6
Research and development 4.2 4.6 4.7
Income from operations 3.4 7.7 7.6
Income before income tax expense .8 6.1 6.3
Net Income .9 4.1 3.6
Sales increased by $13,487,936 or 17.3%, in 2000 compared to an increase of
$9,582,219, or 14.0%, in 1999, and an increase of $7,798,346, or 12.9%, in 1998.
Incremental sales of $7.1 million from the August 1999 Angleton catheter line
acquisition was the largest contributing factor to the sales rise in 2000. Sales
growth from 1998 through 2000 was also favorably affected by the introduction of
new products and increased sales of existing products sold separately and
packaged in custom kits, and increased penetration of the market by Merit's
inflation devices. International sales in 2000 were approximately $23.0 million
or 25%, compared to $18.3 million, or 24%, in 1999, and $15.2 million or 22%, in
1998. These increases were primarily a result of the addition of the Angleton
product lines, ongoing growth in the direct sales in Europe, as well as greater
acceptance of the Company's products in other international markets. Direct
sales in France, Germany, the U.K., Belgium, the Netherlands and Canada were
$8,621,681, $8,217,814, and $7,334,793 in 2000, 1999 and 1998, respectively.
Gross profit as a percent of sales was 33.5%, 38.5%, and 37.9% in 2000,
1999, and 1998, respectively. The Company is operating in a generally declining
price market. There is also a general cost-increasing manufacturing environment.
12
Merit has been able to battle this difficult situation with ever-increasing
production volumes until 2000. Beginning in early 1999, the Company suffered
through the implementation of a comprehensive new software system, which in the
operations areas lead to difficulties in efficiently operating the purchasing,
planning and manufacturing processes of the business. Merit also made a
purposeful effort to increase its safety stock levels of inventory in
preparation for higher, anticipated sales orders ahead of Y2K. The combination
of these increased production demands created a build-up of capacity in labor
and overhead. As the end of 1999 approached, however, the Company needed to
reduce production levels to match cash-flow expectations. The reduced production
volumes created higher overhead cost per unit, lower gross margins, and lower
bottom-line results. Another important factor negatively effecting gross margins
was the large (13.2%) drop in the Euro in relation to the dollar during 2000.
This reduced revenues and gross profit of the European operation by $1,076,975
and reduced over all gross margins by 1.2%. In December 1999, the Company began
the difficult process of down-sizing the labor and overhead capacities in the
operation of its Utah facilities. The Company has made significant progress
toward eliminating the large excess negative production variances that were
caused by the slow-down in production volumes. This was accomplished by the
reduction of approximately 240 people from its high point in December of 1999,
or an average reduction of 100 people in 2000 compared to 1999. This was
accomplished primarily by attrition. There have been many cost reductions and
efficiency gains which will lead to improved margins in 2001. Margins improved
in 1999 compared to 1998, principally through increased production volumes,
automation and efficiencies in manufacturing, and tighter price controls on some
of the Company's lower margin products. Part of the increased production volumes
resulted in a significant increase in inventories in 1999.
Selling, general and administrative expenses increased $2,893,425, or
14.2%, in 2000 over 1999 and $2,878,926, or 16.4%, in 1999 over 1998. These
additional expenditures were related principally to increased costs of expanding
the direct sales force and their management both in U.S. and Europe. Another
important factor has been the costs of implementing and supporting the Company's
new Oracle system and the development of new business opportunities such as
acquisitions, product distribution agreements, national accounts and the O.E.M
segment of the business. These increases in costs have grown slower than sales
causing selling, general and administrative expenses as a percent of sales to
decrease to 25.5% in 2000, compared to 26.2% in 1999 after increasing from 25.6%
in 1998.
Research and development expenditures for 2000 were $3,864,171, an increase
of 7%, compared to $3,618,041 in 1999. Most of this increase was due to the
addition of the R&D capabilities in Angleton, Texas with the Company's newly
acquired catheter technologies. R&D expenses increased in 1999 by 12%, compared
to $3,244,477 in 1998. Research and development costs as a percent of sales were
4.2%, 4.6% and 4.7% for 2000, 1999 and 1998, respectively.
Significantly lower gross margins have more than offset the gains in sales
as well as the efficiencies in SG&A and R&D Expenses, the net of which resulted
in income from operations of $3,128,555 down 48% from 1999. The higher sales and
gross margins, together with modest increases in operating expenses, positively
affected income from operations in 1999 which increased to $6,016,792, up 16.4%,
compared to $5,171,005 in 1998. The income tax benefit for 2000 was $52,712, an
effective rate of -6.8%. This unusual tax rate was due principally to R&D tax
credits which the Company was able to realize in the fourth quarter of 2000
including amended returns for the 1997, 1998 and 1999 tax years. Management
expects the R&D tax credit to continue to favorably affect the Company's tax
rate for at least the next two years. The income tax provision for 1999 was
$1,687,379, an effective rate of 30.6%, compared to $1,454,762, or 39.3 % in
1998. The effective tax rate improved significantly in 1999 as the Ireland
facility became profitable and the 10% tax rate became a benefit.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000 the Company's working capital was $32,447,007, a
decrease of over 4%, representing a current ratio of 4.4 to 1. This decrease was
due primarily to the reduction of $2.3 million in inventory and the repayment of
long-term debt. In October 2000, the Company also negotiated an increase in its
line of credit, to $35 million. The Company had $23 million outstanding under
its line of credit at December 31, 2000. Merit has financed leasehold
improvements and equipment acquisitions through secured notes payable and
capital lease arrangements with an outstanding balance of $2,103,503 at December
31, 2000. For the year ended December 31, 2000 the Company generated cash from
operations in the amount of $7,127,597 the most in the history of the Company.
13
Historically, the Company has incurred significant expenses in connection
with product envelopment and introduction of new products. This was particularly
true in 1999 with regard to an increase in inventory, plant and equipment
associated with the Company's acquisition and new product introductions. The
Company's principal source of funding for these and other expenses has been the
cash generated from operations, secured loans on equipment, bank lines of credit
and sales of equity. The Company believes that its present sources of liquidity
and capital are adequate for its current operation.
Item 7A. Quantitative and Qualitative Disclosure About Market Rider
----------------------------------------------------------
The Company principally hedges the following currencies: Belgian Francs,
German marks, Dutch Gilders, and Irish Pounds. The Company enters into forward
foreign exchange contracts to protect the Company from the risk that the
eventual net dollar cash flows resulting from transactions with foreign
customers and suppliers may be adversely affected by changes in currency
exchange rates. Such contracts are not significant.
As of December 31, 2000, the Company had $23.0 million (1999- $ 25.9 million) of
variable rate debt, all denominated in U.S. dollars. Interest expense would
change by approximately $230,000 for every 1% change in interest rates.
14
Item 8. Financial Statements and Supplementary Data.
MERIT MEDICAL SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 2000 and 1999 and for Each
of the Three Years in the Period Ended December 31, 2000 and Independent
Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Merit Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Merit Medical
Systems, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merit Medical Systems, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
By: /s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 23, 2001
15
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
ASSETS 2000 1999
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 412,384 $ 668,711
Trade receivables - net of allowance for uncollectible
accounts: 2000 - $440,275; 1999 - $305,475 13,235,858 12,550,132
Employee and related party receivables 440,654 502,803
Irish Development Agency grant receivable 177,477 93,059
Inventories 25,273,428 27,521,087
Prepaid expenses and other assets 663,101 564,213
Deferred income tax assets 1,183,944 1,052,745
Income tax refund receivable 588,640 210,112
---------- ----------
Total current assets 41,975,486 43,162,862
---------- ----------
PROPERTY AND EQUIPMENT:
Land 1,260,985 1,365,985
Building 1,500,000 1,500,000
Automobiles 131,036 133,316
Manufacturing equipment 19,696,550 17,617,798
Furniture and fixtures 9,576,084 8,883,297
Leasehold improvements 5,420,194 5,114,964
Construction-in-progress 2,120,671 1,669,725
---------- ----------
Total 39,705,520 36,285,085
Less accumulated depreciation and amortization (17,860,490) (14,277,666)
---------- ----------
Property and equipment - net 21,845,030 22,007,419
---------- ----------
OTHER ASSETS:
Patents and trademarks - net of accumulated amortization:
2000 - $1,382,672; 1999 - $1,179,246 2,522,384 2,319,581
Cost in excess of the fair value of assets acquired - net
of accumulated amortization: 2000 - $417,398; 1999 - $138,022 5,062,458 4,819,288
Deposits 41,273 51,319
---------- ----------
Total other assets 7,626,115 7,190,188
---------- ---------
TOTAL ASSETS $71,446,631 $72,360,469
=========== ==========
(Continued)
See Notes To Consolidated Financial Statements.
16
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,091,725 $ 1,001,917
Trade payables 4,835,517 4,749,432
Accrued expenses 3,471,039 3,092,280
Advances from employees 96,778 116,094
Income taxes payable 33,420 269,441
----------- -----------
Total current liabilities 9,528,479 9,229,164
DEFERRED INCOME TAX LIABILITIES 2,177,833 1,722,094
LONG-TERM DEBT 24,011,778 27,817,308
DEFERRED CREDITS 955,839 901,767
----------- -----------
Total liabilities 36,673,929 39,670,333
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock - 5,000,000 shares authorized as of
December 31, 2000 and 1999, no shares issued
Common stock - no par value; 20,000,000 shares
authorized; 7,788,208 and 7,591,236 shares issued
at December 31, 2000 and 1999, respectively 19,779,765 18,428,572
Retained earnings 15,617,075 14,790,518
Accumulated other comprehensive loss (624,138) (528,954)
----------- -----------
Total stockholders' equity 34,772,702 32,690,136
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $71,446,631 $72,360,469
=========== ===========
(Concluded)
See Notes To Consolidated Financial Statements.
17
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
NET SALES $91,447,512 $77,959,576 $68,377,357
COST OF SALES 60,823,459 47,917,815 42,433,873
----------- ----------- -----------
GROSS PROFIT 30,624,053 30,041,761 25,943,484
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general, and administrative 23,300,352 20,406,927 17,528,002
Research and development 3,864,171 3,618,041 3,244,477
Severance costs 330,975 -- --
----------- ----------- -----------
Total operating expenses 27,495,498 24,024,968 20,772,479
----------- ----------- -----------
INCOME FROM OPERATIONS 3,128,555 6,016,793 5,171,005
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 39,091 50,391 33,662
Interest expense (2,319,500) (1,293,023) (826,778)
Miscellaneous expense (74,301) (12,732) (87,543)
----------- ----------- -----------
Other expense - net (2,354,710) (1,255,364) (880,659)
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 773,845 4,761,429 4,290,346
INCOME TAX BENEFIT (EXPENSE) 52,712 (1,454,762) (1,687,379)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY -- (81,077) (151,808)
----------- ----------- -----------
NET INCOME $ 826,557 $ 3,225,590 $ 2,451,159
=========== =========== ===========
EARNINGS PER COMMON SHARE -
Basic and diluted $ .11 $ .43 $ .33
=========== =========== ===========
AVERAGE COMMON SHARES:
Basic 7,729,294 7,541,562 7,420,224
=========== =========== ===========
Diluted 7,860,905 7,565,673 7,488,225
=========== =========== ===========
See Notes To Consolidated Financial Statements.
18
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Accumulated
Other
Common Stock Compre-
-------------------------- hensive Retained
Total Shares Amount Loss Earnings
------------ ----------- ------------ ----------- ------------
BALANCE, JANUARY 1, 1998 $ 25,802,149 7,395,091 $ 17,178,971 $ (490,591) $ 9,113,769
============ =========== ============ ============ ============
Comprehensive income:
Net income 2,451,159 2,451,159
Other comprehensive income -
Foreign currency translation adjustment (net of tax) 218,937 218,937
------------
Comprehensive income 2,670,096
Tax benefit attributable to appreciation of common
stock options exercised 33,398 33,398
Issuance of common stock for cash 81,850 13,819 81,850
Issuance of common stock under Employee
Stock Purchase Plans 267,549 52,425 267,549
Options and warrants exercised 370,914 64,840 370,914
Shares surrendered in exchange for the
recording of payroll tax liabilities (4,588) (569) (4,588)
Shares surrendered in exchange for the
exercise of stock options (135,000) (16,692) (135,000)
------------ ----------- ------------
BALANCE, DECEMBER 31, 1998 29,086,368 7,508,914 17,793,094 (271,654) 11,564,928
Comprehensive income:
Net income 3,225,590 3,225,590
Other comprehensive loss -
Foreign currency translation adjustment (net of tax) (257,300) (257,300)
------------
Comprehensive income 2,968,290
Tax benefit attributable to appreciation of common
stock options exercised 245,200 245,200
Issuance of common stock for cash 62,600 10,990 62,600
Issuance of common stock under Employee
Stock Purchase Plans 312,027 66,330 312,027
Options and warrants exercised 114,746 22,080 114,746
Shares surrendered in exchange for the
recording of payroll tax liabilities (1,583) (264) (1,583)
Shares surrendered in exchange for the
exercise of stock options (97,512) (16,814) (97,512)
------------ ----------- ------------
BALANCE, DECEMBER 31, 1999 32,690,136 7,591,236 18,428,572 (528,954) 14,790,518
============ =========== ============ ============ ============
(Continued)
19
Accumulated
Other
Common Stock Compre-
-------------------------- hensive Retained
Total Shares Amount Loss Earnings
------------ ----------- ------------ ----------- ------------
Comprehensive income:
Net income 826,557
Other comprehensive loss - 826,557
Foreign currency translation adjustment (net of tax) (95,184) (95,184)
------------
Comprehensive income 731,373
Tax benefit attributable to appreciation of common
stock options exercised 172,818 172,818
Issuance of common stock under Employee
Stock Purchase Plans 350,248 64,172 350,248
Options and warrants exercised 933,605 146,660 933,605
Shares surrendered in exchange for the
recording of payroll tax liabilities (9,109) (1,071) (9,109)
Shares surrendered in exchange for the
extinguishment of related party receivable (45,004) (6,546) (45,004)
Shares surrendered in exchange for the exercise of
stock options (51,365) (6,243) (51,365)
------------ ----------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 $ 34,772,702 7,788,208 $ 19,779,765 $ (624,138) $ 15,617,075
============ =========== ============ ============ ============
(Concluded)
See Notes To Consolidated Financial Statements.
20
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 826,557 $ 3,225,590 $ 2,451,159
----------- ----------- -----------
Adjustments to reconcile net income to net cash provided
by operating
activities:
Depreciation and amortization 4,486,291 3,757,539 2,923,484
Losses on sales and abandonment of
property and equipment 49,833 8,339 46,897
Amortization of deferred credits (166,609) (215,894) (114,607)
Deferred income taxes 389,635 450,734 435,489
Tax benefit attributable to appreciation of
common stock options exercised 172,818 245,200 33,398
Minority interest in income of subsidiary -- 81,077 151,808
Changes in operating assets and liabilities, net of
effects from acquisitions:
Trade receivables (685,726) (2,113,647) (837,042)
Employee and related party receivables 17,145 (29,809) (184,182)
Irish Development Agency grant receivable (84,418) 105,386 549,443
Income tax refund receivable (378,528) (210,112)
Inventories 2,274,934 (7,150,393) (3,250,303)
Prepaid expenses and other assets 6,112 71,911 (97,865)
Deposits 10,046 22,899 (27,606)
Trade payables 86,085 1,176,099 134,984
Accrued expenses 378,759 771,936 (358,201)
Advances from employees (19,316) 42,004 (7,155)
Income taxes payable (236,021) 74,719 (174,973)
----------- ----------- -----------
Total adjustments 6,301,040 (2,912,012) (776,431)
----------- ----------- -----------
Net cash provided by operating activities 7,127,597 313,578 1,674,728
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (4,690,107) (4,750,608) (4,138,219)
Intangible assets (406,229) (269,388) (522,671)
Acquisitions (607,129) (11,322,916)
Proceeds from the sale of property and equipment 1,347,613 584,688
----------- ----------- -----------
Net cash used in investing activities (4,355,852) (16,342,912) (4,076,202)
----------- ----------- -----------
(Continued)
See Notes To Consolidated Financial Statements.
21
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) line of
credit facility $(2,907,596) $(7,567,655) $ 3,009,880
Proceeds from:
Issuance of common stock 1,223,379 390,278 580,725
Long-term debt 25,907,596 677,802
Deferred credits 132,513 93,800
Principal payments on:
Long-term debt (1,316,089) (2,403,143) (2,172,753)
Deferred credits (37,899)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (2,867,793) 16,420,876 2,057,755
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH (160,279) (574,741) 218,937
----------- ----------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (256,327) (183,199) (124,782)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 668,711 851,910 976,692
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 412,384 $ 668,711 $ 851,910
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for:
Interest (including capitalized interest of
approximately $128,000, $143,000, and $93,000
during 2000, 1999, and 1998, respectively) $ 2,309,634 $ 1,288,301 $ 995,417
=========== =========== ===========
Income taxes $ 172,202 $ 684,109 $ 1,393,465
=========== =========== ===========
See Notes To Consolidated Financial Statements.
22
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
o During 2000, 1999, and 1998, the Company entered into capital lease
obligations and notes payable for approximately $508,000, $50,000, and
$868,000, respectively, for manufacturing equipment.
o In connection with the sale in 1998 of the Company's manufacturing facility
in Castlerea, Ireland, the buyer assumed debt of the Company in the amount
of approximately $259,000.
o During 2000, 1999, and 1998, options to purchase 1,071, 264, and 569 shares
of the Company's common stock were surrendered in exchange for the
Company's recording of payroll tax liabilities in the amount of
approximately $9,100, $1,600, and $4,600.
o During 2000, 1999, and 1998, 6,243, 16,814, and 16,692 shares of Company
common stock with a value of approximately $51,000, $98,000, and $135,000,
respectively, were surrendered in exchange for the exercise of stock
options.
o uring 1999, the Company acquired substantially all of the assets of the
"Angelton Division" of Mallinckrodt Inc. (Angelton) in a purchase
transaction for $7,867,699 in cash. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired (including goodwill of $ 1,949,383) $ 8,132,194
Cash Paid 7,867,699
------------
Liabilities assumed $ 264,495
============
o Additionally, during 1999, the Company acquired the minority interest in
its subsidiary, Sentir, Inc. (Sentir) in a purchase transaction for
$3,455,217 in cash. The minority interest carried by the Company at the
date of acquisition was $629,577. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired (including goodwill of $ 2,825,640) $ 3,574,016
Cash Paid 3,455,217
------------
Liabilities assumed $ 118,799
============
See Notes To Consolidated Financial Statements. (Concluded)
23
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Merit Medical Systems, Inc. (Merit) and its wholly-owned
subsidiaries, Merit Holdings, Inc. (MHI), and Sentir collectively own 100%
of Merit Medical Systems LP (MMSLP). Combined with its other wholly-owned
subsidiary, Merit Medical International, Inc. (MMI), Merit, MHI, and Sentir
collectively own 100% of Merit Services, Inc. (MSI) (collectively, the
Company). The Company develops, manufactures, and markets disposable
medical products primarily for use in the diagnosis and treatment of
cardiovascular disease which is considered to be one segment line of
business. The Company manufactures its products in plants located in the
United States and in Ireland. The Company has export sales to dealers and
has direct sales forces in the United States, Canada, and Western Europe
(see Note 9).
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United
States of America. The following is a summary of the more significant of
such policies.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation - The consolidated financial statements include
those of Merit, MMI, MHI, MSI, MMSLP and Sentir. All material intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition - The Company recognizes revenues when the product is
shipped which meets the criteria required by Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, which was
issued by the Securities and Exchange Commission in December 1999. The
adoption of SAB No. 101, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements, during 2000
was not significant to the Company's financial statements.
Inventories - Inventories are stated at the lower of cost (computed on a
first-in, first-out basis) or market.
Income Taxes - The Company utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes
are provided for temporary differences in the bases of assets and
liabilities as reported for financial statement and income tax purposes.
Long-Lived Assets - The Company evaluates the carrying value of long-term
assets based on current and anticipated undiscounted cash flows and
recognizes impairment when such cash flows will be less than the carrying
values. There were no impairments as of December 31, 2000 or 1999.
24
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method
over estimated useful lives as follows:
Building 20 years
Automobiles 4 years
Manufacturing equipment 5 to 12 years
Furniture and fixtures 3 to 10 years
Leasehold improvements 4 to 25 years
Intangible Assets - Costs associated with obtaining patents, issued and
pending, and trademarks have been capitalized and are amortized over the
patent or trademark period or charged to expense if not approved. Cost in
excess of fair value of assets acquired has been allocated to goodwill,
which is amortized over twelve to twenty years. Amortization of intangibles
is done on a straight-line basis.
Research and Development - Research and development costs are expensed as
incurred.
Earnings per Common Share - Net income per common share is computed by both
the basic method, which uses the weighted average number of the Company's
common shares outstanding, and the diluted method, which includes the
dilutive common shares from stock options and warrants, as calculated using
the treasury stock method. The amounts of such options and warrants are not
significant and, accordingly, the Company's basic and diluted earnings per
share are the same.
Financial Instruments - The Company's financial instruments, when valued
using market interest rates, would not be materially different from the
amounts presented in the consolidated financial statements.
Stock-Based Compensation - The Company accounts for its stock compensation
arrangements under the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB 25) and intends to
continue to do so. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation.
Statements of Cash Flows - For purposes of the statements of cash flows,
the Company considers interest bearing deposits with an original maturity
date of three months or less to be cash equivalents.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
temporary cash and cash equivalents and accounts receivable. The Company
provides credit, in the normal course of business, primarily to hospitals
and independent third-party packers and distributors. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses.
Foreign Currency Translation Adjustment - The financial statements of the
Company's foreign subsidiaries are generally measured using local
currencies as the functional currency. Assets and liabilities are
translated into U.S. dollars at year-end rates of exchange and results of
operations are translated at average rates for the year. Gains and losses
resulting from these translations are included in accumulated other
comprehensive loss as a separate component of stockholders' equity.
Comprehensive Loss - Accumulated other comprehensive loss consists entirely
of foreign currency translation adjustments.
25
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Recently Issued Financial Accounting Standards - SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, requires that
all derivative instruments be recognized as either assets or liabilities at
fair market value. The Company adopted this statement beginning January 1,
2001. The effect on the Company's financial statements of adopting this
statement was not significant.
2. SEVERANCE COSTS
During the year ended December 31, 2000, the Company terminated
approximately 30 employees and correspondingly accrued a termination cost
of approximately $331,000. This amount is included in operating expenses as
severance costs. As of December 31, 2000, all but approximately $67,000 of
the above amount had been paid to the terminated employees.
3. ACQUISITIONS
On July 27, 1999, the Company acquired the 28% minority interest in its
subsidiary, Sentir, for a purchase price of $3,574,016 consisting of
$3,455,217 in cash and the assumption of liabilities in the amount of
$118,799. Of the $3,574,016 purchase price, $226,463 was paid to related
parties. The acquisition has been accounted for using the purchase method
of accounting; as such, 100 percent of Sentir's results of operations have
been included in the accompanying consolidated financial statements from
the date of acquisition. Previous to the acquisition date, the minority
interest's share of operations was excluded from net income in the
consolidated statements of operations. The cost of this acquisition
exceeded the estimated fair value of the acquired net assets by $2,825,640.
Such excess has been allocated to goodwill and is being amortized on a
straight-line basis over 20 years.
On August 20, 1999, the Company acquired substantially all of the assets
and assumed certain liabilities of the Angelton Division of Mallinckrodt,
Inc. (Angelton) for a purchase price of $8,132,194 consisting of $7,867,699
in cash and the assumption of liabilities in the amount of $264,495.
Angelton is a manufacturer and marketer of medical catheters, introducers,
guide wires, and needles. The acquisition has been accounted for using the
purchase method of accounting; as such, Angelton's results of operations
have been included in the accompanying consolidated financial statements
from the date of acquisition. The cost of this acquisition exceeded the
estimated fair value of the acquired net assets by $1,949,383. Such excess
has been allocated to goodwill and is being amortized on a straight-line
basis over 20 years.
The unaudited pro forma results of operations of the Company for the years
ended December 31, 1999 and 1998 (assuming the acquisition of Angelton had
occurred as of January 1, 1998) are as follows:
1999 1998
------------- -------------
Net sales $ 87,606,126 $ 79,368,263
Net income 3,944,207 3,816,143
Net income per share (basic and diluted) 0.52 0.51
On May 18, 2000, the Company acquired certain assets of Electro-Catheter
Corporation (Elecath) for a purchase price of $607,129 in cash. Elecath
develops, manufactures and sells a broad range of cardiovascular catheters
for use primarily in the Electro physiology, Cath Lab and Critical Care
departments of hospitals. The cost of this acquisition exceeded the
estimated fair value of the acquired assets by $533,793. Such excess has
been allocated to goodwill and is being amortized on a straight-line basis
over 12 years.
26
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
4. INVENTORIES
Inventories consist of the following at December 31, 2000 and 1999:
2000 1999
------------- --------------
Finished goods $ 15,255,622 $ 16,816,578
Work in-progress 3,678,807 3,270,163
Raw materials 8,325,314 8,554,635
Less reserve for obsolete inventory (1,986,315) (1,120,289)
------------- --------------
Total $ 25,273,428 $ 27,521,087
5. INCOME TAXES
Deferred income tax assets and liabilities at December 31, 2000 and 1999
consist of the following temporary differences and carryforward items:
Current Long-Term
-------------------------------- -------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- -------------
Deferred income tax assets:
Allowance for uncollectible
accounts receivable $ 17,788 $ 123,026
Accrued compensation expense 198,338 200,799 $ 9,612
Tax credits 282,630 $ 126,563
Inventory capitalization for
tax purposes 137,513 338,753
Inventory obsolescence reserve 576,319 241,150
Net operating losses of subsidiaries 95,704 90,254 231,989 298,323
Other 192,113 65,078 407,810 367,025
---------------- --------------- ---------------- -------------
Total deferred income tax assets 1,217,775 1,059,060 932,041 791,911
Deferred income tax liabilities:
Tax credits (6,315)
Differences between tax basis
and financial reporting basis
of property and equipment (3,098,747) (2,514,005)
Other (33,831) (11,127)
---------------- --------------- ---------------- -------------
Net $ 1,183,944 $ 1,052,745 $ (2,177,833) $ (1,722,094)
================ =============== ================ =============
27
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Income tax expense for the years ended December 31, 2000, 1999, and 1998
differs from amounts computed by applying the statutory Federal rate to
pretax income as follows (foreign taxes are not considered significant):
2000 1999 1998
--------------- ---------------- -------------
Computed Federal income tax expense at
statutory rate of 35% $ 270,846 $ 1,666,500 $ 1,501,621
State income taxes 25,153 124,352 186,948
Creation of tax credits (444,551) (140,369) (133,529)
Tax benefit of foreign sales corporation (53,139) (109,579) (96,808)
(Gains) losses of subsidiaries recorded
at foreign rates (13,746) (115,803) 183,622
Other - including the effect of graduated rates 162,725 29,661 45,525
--------------- ---------------- -------------
Total income tax (benefit) expense $ (52,712) $ 1,454,762 $ 1,687,379
=============== ================ =============
Consisting of:
Current $(442,347) $ 1,004,028 $ 1,251,890
Deferred 389,635 450,734 435,489
--------------- ---------------- -------------
Total $ (52,712) $ 1,454,762 $ 1,687,379
6. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Revolving Credit Facility - In August 1999, the Company entered into a $28
million long-term revolving credit facility (the Facility) with a bank,
which enables the Company to borrow funds at variable interest rates. In
March 2000, the Company amended the Facility by increasing the amount of
borrowings available to $35 million. The Facility is fully due and payable
on June 30, 2006. The weighted average interest rates applied to the
outstanding balances at December 31, 2000 and 1999 were 8.20% and 7.55%,
respectively. Under the terms of the Facility, among other things, the
Company is required to maintain a ratio of total liabilities to tangible
net worth not to exceed 2.0 to 1.0, maintain a ratio of current assets to
current liabilities of at least 1.5 to 1.0, maintain minimum working
capital of $25,000,000, and is restricted from paying dividends to
shareholders. For the years ended December 31, 2000 and 1999, management of
the Company believes the Company was in compliance with all debt covenants.
As of December 31, 2000 and 1999, the Company owed approximately
$23,000,000 and $26,000,000 under the Facility, respectively. The Facility
is collateralized by trade receivables, inventories, property and
equipment, and intangible assets.
28
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Long-term Debt - Long-term debt consists of the following at December 31,
2000 and 1999:
2000 1999
---------------- -------------
Notes payable to financial institutions; payable in monthly installments
through 2004, including interest at rates ranging
from 6.26% to 8.89%; collateralized by equipment $ 1,963,368 $ 2,634,977
Capital lease obligations (see Note 7) 140,135 276,652
Revolving credit facility (see above) 23,000,000 25,907,596
---------------- -------------
Total 25,103,503 28,819,225
Less current portion 1,091,725 1,001,917
---------------- -------------
Long-term portion $ 24,011,778 $ 27,817,308
================ =============
Scheduled maturities of long-term debt at December 31, 2000 are as follows:
Year ending December 31:
2001 $ 1,091,725
2002 508,664
2003 361,231
2004 61,227
2005 65,764
Thereafter 23,014,892
-------------
Total $ 25,103,503
7. COMMITMENTS AND CONTINGENCIES
Leases - The Company has noncancelable operating lease agreements for
off-site office and production facilities and equipment. The leases for the
off-site office and production facilities are for five years and have
renewal options of one to five years. The Company subleased these
facilities during 1997 for approximately $97,000. Total rental expense on
these operating leases and on the Company's new manufacturing and office
building (see below) for the years ended December 31, 2000, 1999, and 1998
approximated $2,539,000, $3,094,000, and $3,293,000, respectively.
In June 1993, the Company entered into a 25 year lease agreement with a
developer for a new manufacturing and office building. Under the agreement,
the Company was granted an option to purchase the building at fair market
value after 10 years and, if not exercised, after 25 years. In connection
with this lease agreement, the Company in 1993 sold to the developer 10
acres of land on which the building was constructed. The $166,136 gain on
the sale of the land has been recorded as a deferred credit and is being
amortized as a reduction of rent expense over ten years. In connection with
the lease agreement, the Company issued to the developer warrants to
purchase 155,461 shares of the Company's common stock at $4.95 per share
subject to carrying cost increases of 3% per year ($5.74 as of December 31,
2000). The warrants expire in 2005.
On December 22, 2000, the Company sold certain of its manufacturing
equipment with a net carrying value of approximately $1,210,000 to a
financial institution. The Company then entered into a six-year operating
lease agreement for the same equipment. The approximate $70,000 gain on
sale has been recorded as a deferred credit and is being amortized as a
reduction of rental expense over six years.
29
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
The Company leases certain manufacturing and office equipment under
long-term capital lease agreements, some of which require the lease
payments over a period shorter than the lease term. Capital leases are
collateralized by equipment with a recorded cost approximating $848,500
with accumulated amortization of approximately $210,000 and $157,000 as of
December 31, 2000 and 1999, respectively.
The future minimum lease payments, together with the present value of the
net minimum capital lease payments as of December 31, 2000, are as follows:
Operating Capital
Leases Leases
Year ending December 31:
2001 $ 2,497,179 $ 146,213
2002 2,227,406
2003 2,060,857
2004 2,045,507
2005 1,985,963
Thereafter 22,188,192
---------------- -------------
Total minimum lease payments $ 33,005,104 146,213
Less amount representing interest and executory costs ================ (6,078)
Present value of net minimum lease payments (see Note 6) -------------
140,135
=============
Irish Government Development Agency Grants - Through December 31, 2000, the
Company has entered into several grant agreements with the Irish Government
Development Agency of which approximately $177,000 and $93,000 remained in
receivables at December 31, 2000 and 1999, respectively. The grant
agreements reimburse the Company for a portion of the cost of property and
equipment purchased in Ireland, specific research and development projects
in Ireland, and costs of hiring and training employees located in Ireland.
The Company has recorded the grants related to research and development
projects and costs of hiring and training employees as a reduction of
operating expenses in 2000, 1999, and 1998 in the amounts of approximately
$67,000, $154,000, and $164,000, respectively. Grants related to the
acquisition of property and equipment purchased in Ireland are recorded as
deferred credits and are amortized to income over lives corresponding to
the depreciable lives of such property. During 2000, 1999, and 1998,
approximately $149,000, $142,000, and $98,000, respectively, of the
deferred credit was amortized as a reduction of operating expenses.
Preferred Share Purchase Rights - In August 1997, the Company declared a
dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock which entitles the holder of a Right to
purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock at an exercise price of $40 in the event a person or group
acquires, or announces an intention to acquire, 15% or more of the
Company's common stock. Until such an event, the Rights are not exercisable
and are transferable with the common stock and may be redeemed at a price
of $.0001 per Right.
Litigation - In the ordinary course of business, the Company is involved in
litigation and claims which management believes will not have a materially
adverse effect on the Company's operations.
30
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
8. EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTIONS AND WARRANTS
The Company offers to its employees an Employee Stock Purchase Plan which
allows the employee on a quarterly basis to purchase shares of the
Company's common stock at the lesser of 85% of the market value on the
offering commencement date or offering termination date. The total number
of shares available to employees to purchase under this plan is 500,000 of
which 236,921 have been purchased as of December 31, 2000.
The Company has a long-term incentive plan which provides for the issuance
of incentive stock options, nonstatutory stock options, and certain
corresponding stock appreciation rights. The maximum number of shares of
common stock for which options may be granted is 2,400,000. Options may be
granted to directors, officers, outside consultants, and key employees of
the Company and may be granted upon such terms and such conditions as the
Compensation Committee in its sole discretion shall determine. In no event,
however, shall the exercise price be less than the fair market value on the
date of grant.
Changes in stock options and warrants for the years ended December 31,
2000, 1999, and 1998 are as follows:
Options Warrants
--------------------------------- -------------------------------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
2000:
Granted 485,600 $4.50
Exercised 146,660 6.37
Forfeited/expired 124,440 6.94
Outstanding at December 31 1,727,940 6.14 155,461 $5.74
Exercisable 820,200 6.97 155,461 5.74
Weighted average fair value of
options granted during year $2.00
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.96
31
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Options Warrants
--------------------------------- -------------------------------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1999:
Granted 448,900 $5.84
Exercised 22,080 4.96
Forfeited/expired 61,150 5.70
Outstanding at December 31 1,513,440 7.02 155,461 $5.57
Exercisable 740,480 7.20 155,461 5.57
Weighted average fair value of
options granted during year $2.98
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.83
Options Warrants
--------------------------------- -------------------------------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1998:
Granted 203,500 $6.41
Exercised 64,840 5.80
Forfeited/expired 47,990 6.41
Outstanding at December 31 1,147,770 6.76 155,461 $5.41
Exercisable 486,230 7.45 155,461 5.41
Weighted average fair value of
options granted during year $3.14
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.90
32
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
The following table summarizes information about stock options and warrants
outstanding at December 31, 2000:
Options and Warrants
Options and Warrants Outstanding Exercisable
- ------------------------------------------------------------------------ ----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
Options:
$4.50-$7.25 1,276,540 3.24 $ 5.47 457,200 $ 6.01
7.50-10.625 451,400 1.30 8.05 363,000 8.17
Warrants:
$ 5.74 155,461 4.00 5.74 155,461 5.74
The Company accounts for stock options granted using APB 25. Accordingly,
no compensation cost has been recognized for its fixed stock option plans.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under
those plans consistent with SFAS No. 123, the Company's net income and net
income per common and common equivalent share would have changed to the pro
forma amounts indicated below:
2000 1999 1998
Net income:
As reported $ 826,557 $ 3,225,590 $ 2,451,159
Pro forma 140,145 2,480,928 1,840,182
Net income per common (both basic and diluted) share:
As reported $0.11 $ 0.43 $ 0.33
Pro forma 0.02 0.33 0.25
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999, and 1998: dividend yield of 0%;
expected volatility of 61.04%, 56.0%, and 55.2% for 2000, 1999, and 1998,
respectively; risk-free interest rates ranging from 4.58% to 7.36%; and
expected lives ranging from 2.33 to 4.5 years.
9. SEGMENT REPORTING AND FOREIGN OPERATIONS
During the years ended December 31, 2000, 1999, and 1998, the Company had
foreign sales of approximately $22,968,000, $18,336,000, and $15,198,000 or
approximately 25%, 24%, and 22%, respectively, of total sales, primarily in
Japan, Germany, France, and the United Kingdom.
The Company operates primarily in one segment in which it develops,
manufactures, and markets disposable medical products, principally for use
in the diagnosis and treatment of cardiovascular disease. Major operations
outside the United States include a leased manufacturing and distribution
facility in Ireland and sales subsidiaries in Europe. The following is a
summary of the Company's foreign operations by geographic area for fiscal
years 2000, 1999, and 1998:
33
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Transfers
Sales to Between Net
Unaffiliated Geographic Income Identifiable
Customers Areas Revenue (Loss) Assets
Fiscal year ended December 31, 2000:
United States, Canada, and
international distributors $ 80,380,485 $ 1,060,749 $ 81,441,234 $ 2,301,524 $ 61,897,460
Europe direct and European
distributors 11,067,027 4,906,800 15,973,827 (1,608,513) 9,549,171
Eliminations (5,967,549) (5,967,549) 133,546
------------ ------------ ------------ ----------- ------------
Consolidated $ 91,447,512 None $ 91,447,512 $ 826,557 $ 71,446,631
============ ============ ============ =========== ============
Fiscal year ended December 31, 1999:
United States, Canada, and
international distributors $ 69,595,418 $ 1,288,485 $ 70,883,903 $ 3,761,605 $ 62,666,167
Europe direct and European
distributors 8,364,158 4,281,400 12,645,558 (319,784) 9,694,302
Eliminations (5,569,885) (5,569,885) (216,231)
------------ ------------ ------------ ----------- ------------
Consolidated $ 77,959,576 None $ 77,959,576 $ 3,225,590 $ 72,360,469
============ ============ ============ =========== ============
Fiscal year ended December 31, 1998:
United States, Canada, and
international distributors $ 60,407,019 $ 1,386,073 $ 61,793,092 $ 3,373,280 $ 41,547,669
Europe direct and European
distributors 7,970,338 2,546,099 10,516,437 (593,677) 9,117,117
Eliminations (3,932,172) (3,932,172) (328,444)
------------ ------------ ------------ ----------- ------------
Consolidated $ 68,377,357 None $ 68,377,357 $ 2,451,159 $ 50,664,786
============ ============ ============ =========== ============
Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with the rules and regulations of
governing tax authorities. Such transfers are eliminated in the
consolidated financial statements. Net income by geographic areas reflects
foreign earnings reported by the foreign entities. Identifiable assets are
those assets that can be directly associated with a particular foreign
entity and thus do not include assets used for general corporate purposes.
10. RELATED PARTY TRANSACTIONS
Receivables from employees and related parties at December 31, 2000 and
1999 totaled approximately $441,000 and $503,000, respectively, (including
approximately $208,000 and $267,000, respectively, from officers of the
Company). During 2000, approximately 45,000 shares of Company stock were
surrendered in exchange for the extinguishment of a related party
receivable.
11. ROYALTY AGREEMENT
On April 8, 1992, the Company settled litigation involving, among other
things, allegations that certain of the Company's inflation device products
infringed patents issued to another medical product manufacturing company
(the Licensor).
34
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
Pursuant to the settlement, the Company entered into a license agreement
with the Licensor, whereby the Licensor granted to the Company a
nonexclusive right and license to manufacture and sell products which are
subject to the patents issued to the Licensor. For the rights and license
granted under the agreement, the Company paid the Licensor a nonrefundable
prepaid royalty in the amount of $600,000. The royalty was paid upon
execution of the agreement and represented a prepaid royalty covering the
first seven years of the agreement, which concluded during the year ended
December 31, 1999. In addition to the prepaid royalty, the Company agreed
to pay the Licensor a continuing royalty beginning January 1, 1992 of 5.75%
of sales (which will not exceed $450,000 for any calendar year) made in the
United States, of products covered by the license agreement. Royalties of
$450,000 were paid or accrued in each of the years ended December 31, 2000,
1999, and 1998.
The Licensor has released the Company from all damages, claims, or rights
of action which the Licensor may have had related to the alleged
infringement of the patents issued to the Licensor. The Company has also
agreed to not proceed against the Licensor for the alleged misappropriation
by the Licensor of the Company's confidential and proprietary information.
12. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) savings and profit sharing plan (the
Plan) covering all full-time employees who are at least 21 years of age and
have a minimum of six months of service to the Company. The Company may
contribute at its discretion matching contributions based on the employees'
compensation. Contributions made by the Company to the Plan for the years
ended December 31, 2000, 1999, and 1998 totaled approximately $258,000,
$88,000, and $18,000, respectively.
The Plan purchased unissued shares of the Company's common stock at market
value during each of the three years ended December 31, 2000 as follows:
Market
Shares Value
Years ended December 31:
2000 None None
1999 10,990 $62,600
1998 13,819 81,850
35
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- --------------------------------------------------------------------------------
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly data (unaudited) for the years ended December 31, 2000, 1999, and
1998 is as follows:
Quarter Ended
-----------------------------------------------------------------------
2000 March 31 June 30 September 30 December 31
Net sales $ 22,080,435 $ 23,552,859 $ 23,330,203 $ 22,484,015
Gross profit 7,634,050 7,616,239 7,958,848 7,414,916
Income from operations 289,575 647,698 1,224,604 966,678
Income tax expense (benefit) (68,347) 19,254 169,026 (172,645)
Net income (loss) (159,482) 44,927 394,397 546,715
Basic and diluted net income
(loss) per share (0.02) 0.01 0.05 0.07
1999
Net sales $ 17,701,723 $ 18,979,739 $ 19,920,419 21,357,695
Gross profit 6,692,102 7,349,765 7,763,440 8,236,454
Income from operations 1,070,736 1,477,316 1,705,782 1,762,959
Income tax expense 255,731 446,516 463,321 289,194
Net income 565,123 752,684 928,768 979,015
Basic and diluted net income
per share 0.08 0.10 0.12 0.13
1998
Net sales $ 16,466,015 $ 17,974,170 $ 16,703,033 17,234,139
Gross profit 6,163,161 6,812,741 6,432,783 6,534,799
Income from operations 1,108,003 1,382,228 1,543,092 1,137,682
Income tax expense 459,115 548,306 542,743 137,215
Net income 427,655 586,558 722,836 714,110
Basic and diluted net income
per share 0.06 0.08 0.10 0.09
******
36
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure.
----------------------------------------------------------------------
None.
PART III
Items 10, 11, 12 and 13.
These items are incorporated by reference to the Company's definitive
Proxy Statement relating to the Annual Meeting of Shareholders scheduled for May
23, 2001. The definitive Proxy Statement will be filed with the Commission not
later than 120 days after December 31, 2000, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
---------------------------------------------------------------
(a) Documents filed as part of this report:
(1)Financial Statements. The following financial statements are
incorporated by reference as provided in -------------------- Item 8
of this report:
-- Independent Auditors' Report
-- Consolidated Balance Sheets as of December 31, 2000 and 1999
-- Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998
-- Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998
-- Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998
-- Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
----------------------------
-- Schedule II - Valuation and qualifying account
all other schedules have been omitted because they
are not required, not applicable, or the information
is otherwise set forth in the financial statements or
notes thereto.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
The following exhibits required by Item 601 of Regulation S-K
are filed herewith or have been filed previously with the Commission
as indicated below:
37
Description Exhibit No.
------------------------------------------------------------------ ------------------------------
3.1 Articles of Incorporation of the Company, as amended and restated* [Form 10-Q filed August 14,
1996, Exhibit No. 1]
3.2 Bylaws of the Company* [Form S-18 filed October 19,
1989, Exhibit No. 2]
4 Specimen Certificate of the Company's Common Stock, no par [Form S-18 filed October 19,
value* 1989, Exhibit No. 10]
10.1 Merit Medical Systems, Inc. Long Term Incentive Plan (as amended [Form 10-Q filed August 14,
and restated) dated March 25, 1996* 1996, Exhibit No. 2]
10.2 Merit Medical Systems, Inc. 401(k) Profit Sharing Plan (as amended [Form S-1 filed February 14,
effective January 1, 1991* 1992, Exhibit No. 8]
10.3 License Agreement, dated April 8, 1992 between the Company and [Form S-1 filed February 14,
Utah Medical Products, Inc.* 1992, Exhibit No. 5]
10.4 Lease Agreement dated as of June 8, 1993 for office and [Form 10-K for year ended
manufacturing facility* December 31, 1994, Exhibit
No. 10.5]
10.5 Loan Agreement with Zions First National Bank dated October 10, [Form 10-K for year ended
1995* December 31, 1995, Exhibit
No. 10.5
10.6 Amendment to Loan Agreement with Zions First National Bank [Form 10-K for year ended
dated October 10, 1997 December 31, 1997, Exhibit
No. 10.5]
[Form 10-K for year ended
10.7 Amendment to Loan Agreement with Zions First National Bank December 31, 1998, Exhibit
dated August 11, 1999 No.10.7]
[Form 10-K for year ended
December 31, 1999, Exhibit
10.8 Amendment to Loan Agreement with Zions First National Bank No.10.8]
dated
10.9 Agreement of sale by and between Merit Medical Systems, Inc. and [Form 8-K dated August 20,
Mallinckrodt Inc. dated August 20, 1999 1999, Exhibit No. 10.1]
10.10 Amendment to Loan Agreement with Zions First National Bank Filed herewith
3/11/2000
10.11 Merit Medical Systems, Inc. Highly Compansated Deferred Filed herewith
Compenstaion Plan.
13.1 Annual Report to Shareholders for the year ended December 31,
2000. Certain portions of this exhibit are incorporated by
reference into this Report on Form 10-K; except as so
incorporated by reference, the Annual Report to Shareholders is
not deemed filed as part of this Report on Form 10-K.
23.1 Consent of Independent Auditors Filed herewith
- -------------------------------
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules: There are no financial statement
schedules required to be filed with this report.
38
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 2001.
MERIT MEDICAL SYSTEMS, INC.
By: FRED P. LAMPROPOULOS, PRESIDENT
----------------------------------
Fred P. Lampropoulos, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29,2001.
Signature Capacity in Which Signed
--------- ------------------------
/s/: FRED P. LAMPROPOULOS President, Chief Executive Officer and Director
- ---------------------------
Fred P. Lampropoulos
/s/:KENT W. STANGER Chief Financial Officer, Secretary, Treasurer and
- ---------------------------- Director (Principal financial and accounting
Kent W. Stanger officer)
/s/:RICHARD W. EDELMAN Director
- ---------------------------
Richard W. Edelman
/s/:REX C. BEAN
- ---------------------------
Rex C. Bean Director
/s/:JAMES J. ELLIS
- ---------------------------
James J. Ellis Director
/s/:MICHAEL E. STILLABOWER
- ---------------------------
Michael E. Stillabower Director
39
FIRST AMENDMENT
TO LOAN AGREEMENT
This First Amendment to Loan Agreement (the "Amendment") is made and
entered into among Merit Medical Systems, Inc. ("Merit Medical"), Merit
Holdings, Inc. ("Merit Holdings"), Sentir Semiconductor, Inc. ("Sentir") (Merit
Medical, Merit Holdings and Sentir are collectively called "Borrowers") and
Zions First National Bank ("Lender").
Recitals
--------
1. Borrowers and Lender have entered in an Amended and Restated
Loan Agreement dated August 11, 1999 (the "Agreement").
2. Borrowers and Lender desire to modify and amend the Agreement
as provided herein.
Amendment
---------
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Borrowers and Lender hereby agree and amend and
modify the Agreement as follows:
1. Definitions. Except as otherwise expressly provided herein,
terms assigned defined meanings in the Agreement shall have the same defined
meanings in this Amendment.
2. Amended Definitions. The definitions of "Borrowing Base"and
"Facility Amount" in Section 1.1 of the Agreement are amended in their entirety
to read as follows:
"Borrowing Base" means the sum of (a) 75% of the net book
value, as determined by Lender, of all accounts receivable of Borrowers
in which Lender has a first priority, fully perfected security
interest, (b) 45% of the net book value, as determined by Lender, of
all inventory of Borrowers in which Lender has a first priority, fully
perfected security interest to the extent that (x) the net book value
of inventory of Borrowers as of the fiscal month most recently ended
divided by (y)(a)(i) the cost of goods sold of Borrowers for the fiscal
quarter most recently ended (and in the case of any acquisition by any
Borrower, the cost of goods sold for such acquired property for such
fiscal quarter as reasonably determined by Lender) multiplied by
(ii)four (4) divided by (b) 365, does not exceed 175, provided that if
such calculation exceeds 175, such inventory is excluded from the
Borrowing Base to the extent and only to the extent that such
calculation exceeds 175, (c) 70% of the appraised value, acceptable to
Lender, of all real property of Borrowers in which Lender has a first
priority, fully perfected lien, (d) 70% of the appraised value,
acceptable to Lender, of all equipment of Borrowers in which Lender has
a first priority, fully perfected security interest, and (e) (i) 65% of
the net book value, as determined by Lender, of all equipment of
Borrowers for which there is not an appraisal acceptable to Lender and
in which Lender has a fully perfected security interest minus (ii) the
1
outstanding principal amount owing by Borrowers in respect of all such
equipment which is subject to a security interest superior to the
security interest of Lender in such equipment.
"Facility Amount" means thirty-five million dollars
($35,000,000.00) as such amount is reduced by three hundred
seventy-five thousand dollars ($375,000.00) on the last day of each
quarter commencing with the quarter ending March 31, 2001.
3. Section 3.1 Section 3.1 of the Loan Agreement is amended by
adding a new subsection c. to read as follows:
c. A deed of trust upon real property of Merit Medical located
in Brazoria County, Texas.
4. Section 6.6 a. Section 6.6 a. of the Loan Agreement is amended
in its entirety to read as follows:
a. Annual audited financial statements with an unqualified
opinion for each fiscal year of each Borrower from an independent
accounting firm and in a form acceptable to Lender, to be delivered to
Lender within ninety-five (95) days of the end of the fiscal year. Each
Borrower shall also submit to Lender copies of any management letters
or other reports submitted to such Borrower by independent certified
public accountants in connection with examination of the financial
statements of such Borrower made by such accountants.
5. Conditions to Effectiveness of Amendment. The amendments set forth
above shall become effective, as of the date and year set forth below, on such
date (the "First Amendment Effective Date") when the following conditions shall
have been satisfied in a form and substance acceptable to Lender:
a. This Amendment, the Replacement Promissory Note in the form
of Exhibit A hereto (the "Replacement Promissory Note"), and all other
documents contemplated by this Amendment to be delivered to Lender
prior to funding have been fully executed and delivered to Lender.
b. All of the documents contemplated by this Amendment which
require filing or recording have been properly filed and recorded so
that all of the liens and security interests granted to Lender in
connection with this Amendment will be properly created and perfected
and will have a priority acceptable to Lender.
c. All other conditions precedent provided in or contemplated
by the Agreement, the Security Documents, or any other agreement or
document have been performed.
d. As of the First Amendment Effective Date, the following
shall be true and correct: (1) all representations and warranties made
by Borrowers in the Agreement are true and correct as of the First
2
Amendment Effective Date; and (2) no Event of Default has occurred
under the Agreement and no conditions exist and no event has occurred,
which, with the passage of time or the giving of notice, or both, would
constitute an Event of Default under the Agreement.
All conditions precedent set forth in the Agreement, the Security
Documents, or in any other document relating thereto are for the sole benefit of
Lender and may be waived unilaterally by Lender.
6. Collateral. The Loan and the Replacement Promissory Note are
secured by the collateral identified in, and contemplated by the Agreement,
including, without limitation, the various Security Agreements, dated August 11,
1999, executed by the Borrowers, and by the Collateral described in Section 3.1
Collateral of the Agreement.
7. Representations and Warranties. Each Borrower hereby affirms and
again makes the representations and warranties set forth in Article 5
Representations and Warranties as of the First Amendment Effective Date. Each
Borrower represents and warrants that there have been no changes to the
Organizational Documents of such Borrower since August 11, 1999.
8. Authorization. Borrower represents and warrants that the execution,
delivery, and performance by Borrowers of this Amendment, the Replacement
Promissory Note, and all agreements, documents, obligations, and transactions
herein contemplated have been duly authorized by all necessary action on the
part of such Borrower and are not inconsistent with such Borrower's
Organizational Documents or any resolution of the Board of Directors of such
Borrower, do not and will not contravene any provision of, or constitute a
default under, any indenture, mortgage, contract, or other instrument to which
such Borrower is a party or by which it is bound, and that upon execution and
delivery hereof and thereof, this Amendment and the Replacement Promissory Note
will constitute legal, valid, and binding agreements and obligations of each
Borrower, enforceable in accordance with their respective terms.
9. Payment of Expenses and Attorney's Fees. Borrowers shall pay all
reasonable expenses of Lender relating to the negotiation, drafting of
documents, and documentation of this Amendment, including, without limitation,
title insurance, recording fees, filing fees, and reasonable attorney's fees and
legal expenses. If such expenses are not promptly paid, Lender is authorized and
directed, upon execution of this Amendment and fulfillment of all conditions
precedent hereunder, to disburse a sufficient amount of the Loan proceeds to pay
in full these expenses.
10. Agreement Remains in Full Force and Effect. Except as expressly
amended or modified by this Amendment, the Agreement remains in full force and
effect.
11. Counterpart Execution. This Amendment may be executed in several
counterparts, without the requirement that all parties sign each counterpart.
Each of such counterparts shall be an original, but all counterparts together
shall constitute one and the same instrument.
12. Integrated Agreement; Amendment. This Amendment, together with the
Agreement, Replacement Promissory Note, Security Documents, and the other
agreements, documents, obligations, and transactions contemplated by the
Agreement and the Amendment, constitute the entire agreements and understandings
3
between the parties and supersede all other prior and contemporaneous agreements
and may not be altered or amended except by written agreement signed by the
parties. This Amendment and the Agreement shall be read and interpreted together
as one agreement. PURSUANT TO UTAH CODE SECTION 25-5-4, BORROWER IS NOTIFIED
THAT THESE AGREEMENTS ARE A FINAL EXPRESSION OF THE AGREEMENT BETWEEN LENDER AND
BORROWERS AND THESE AGREEMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY
ALLEGED ORAL AGREEMENT. All other prior and contemporaneous agreements,
arrangements and understandings between the parties hereto as to the subject
matter hereof are, except as otherwise expressly provided herein, rescinded.
Dated: March 14, 2000
Lender:
Zions First National Bank
By:
---------------------------
Title:
------------------------
Borrowers:
Merit Medical Systems, Inc.
By:
---------------------------
Title:
------------------------
Merit Holdings, Inc.
By:
---------------------------
Title:
Sentir Semiconductor, Inc.
By:
---------------------------
Title:
------------------------
EXHIBIT A
4
MERIT MEDICAL SYSTEMS, INC.
HIGHLY COMPENSATED DEFERRED COMPENSATION PLAN
THIS MERIT MEDICAL SYSTEMS, INC. HIGHLY COMPENSATED DEFERRED
COMPENSATION PLAN (the "Plan") is established effective as of January 1, 2001,
by Merit Medical Systems, Inc., (the "Company") a Utah corporation with its
principal office in Salt Lake City, Utah.
RECITALS
--------
1. The Company desires to establish and maintain a nonqualified,
unfunded plan for the purpose of providing deferred compensation to Executives
who are members of a select group of management or highly compensated employees
of the Company. It is the intent of the Company that the Plan be deemed a "top
hat" plan under ERISA and the Plan should be construed consistent with this
purpose.
2. Each Executive who executes a Deferral Agreement adopts the Plan
becomes a party hereto, and agrees to deferral of his or her Compensation as
more particularly described hereafter.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants,
promises and conditions herein contained, the Company and each Executive who
executes a Deferral Agreement agree:
1. Definitions. For purposes of the Plan the following definitions
shall apply:
a. Beneficiary shall mean individual(s), trust(s) or other
entity(ies) designated by the Executive in writing to the Company. The Executive
may designate primary, contingent or multiple Beneficiaries and may revoke any
prior designation. Upon the death of the Executive, the most recent designation
shall control. If no Beneficiary is designated, or if no designated Beneficiary
survives the Executive, the payments payable to the Executive under the Plan
shall be payable to the Executive's surviving spouse, and if no surviving
spouse, to the Executive"s estate. A named Beneficiary (or spouse, if no other
named Beneficiary) must survive the Executive by a minimum of thirty (30) days
in order to be treated as a Beneficiary or surviving spouse under this
provision.
b. Code shall mean the Internal Revenue Code of 1986, as amended.
References to a Code section shall be deemed to be to that section as it now
exists and to any successor provision.
c. Compensation shall mean all amounts paid to the Executive by
the Company for services rendered that are included in the Executive's gross
income. Compensation shall be taken into account at its present value.
d. Deferral Agreement shall mean the document executed by the
Executive and the Company in the form attached hereto as Exhibit "A."
e. Deferred Amount shall mean the amount that is to be deferred
from the Executive's Compensation as designated in the Deferral Agreement.
f. Deferred Compensation Account shall mean a liability account
on the books of the Company, maintained for bookkeeping purposes only, which
shall reflect the total of all Deferred Amounts, together with Income attributed
to the Account in accordance with the Investment Model selected from time to
time by the Executive. The right of the Executive to receive from the Company
any amount in the Deferred Compensation Account shall be determined strictly in
accordance with the terms of the Plan.
g. Executive shall mean an Employee of the Company who is
selected by the Company to participate in the Plan and who has Compensation for
-2-
the Look Back Year at least equal to $85,000, but less than that required for
the Company"s Select Highly Compensated Deferred Compensation Plan. Look-back
Year" means the Plan Year immediately preceding the Plan Year for which the
determination is being made. Further, the Company and the Executive acknowledge
that the Executive is a member of a select group of management or a highly
compensated employees. The minimum dollar Compensation amount set forth in this
paragraph shall be adjusted at the same time and in the same amount as the
dollar amount under Internal Revenue Code "414(q).
h. Income shall mean with respect to a Deferred Compensation
Account all increases or decreases that result in applying the Investment Model
selected by the Executive to a Deferred Compensation Account.
i. Investment Model shall mean the performance model(s)
established by the Company that may be selected by the Executive to determine
the amount of Income attributed to the Executive's Deferred Compensation Account
in accordance with Section 6 of the Plan.
j. Plan Year shall mean the twelve consecutive month period
commencing each January 1 and ending each December 31 thereafter.
2. Term of Plan. The Plan is effective as of the date established by the
Company. With respect to a the Executive, it shall be effective as of the date
the Executive's Deferral Agreement is effective and shall remain in effect until
the entire amount in the Deferred Compensation Account has been distributed to
the Executive or his or her designated Beneficiary.
3. Effect on Employment of Executive. The Plan does not supersede or
revoke any written employment contract which may exist between the Company and
the Executive. In the event of a conflict between the terms of the Plan and any
employment contract, the terms of the employment contract shall control. Nothing
contained herein shall be construed as conferring upon the Executive the right
to continue in the employ of the Company in any capacity.
-3-
4. Deferred Compensation. The Company shall pay to the Executive or
his/her Beneficiary deferred compensation in the amount of his/her Deferred
Compensation Account established by the Company according to the terms of the
Plan and the Deferral Agreement.
5. Deferred Amount. Upon execution and delivery of a Deferral Agreement
the Company shall withhold from the Executive's Compensation the Deferred Amount
set forth in the Deferral Agreement. The right of the Executive to receive the
Deferred Amount shall be governed by the terms of the Deferral Agreement and the
Plan. The Deferral Agreement must be properly completed, signed and delivered to
the Company prior to the first day of the Plan Year for which Compensation is to
be earned. The Deferral Agreement shall remain in effect for the Plan Year and
for all subsequent Plan years until amended or revoked by the Executive as
provided in this Section. The Agreement shall define the amount of Compensation
that shall be deferred for the Plan Year, and for all subsequent Plan Years. The
Deferral Agreement shall be applicable only to Compensation earned after the
date on which the Deferral Agreement is effective. The Executive may modify
(increase, decrease or revoke) the Deferred Amount effective as of the first
practical payroll that begins at least two weeks after the execution of a new
Deferral Agreement. Requests for reinstatement of the Deferred Amount will be
effective on the first payroll after the first of the month. Modification shall
be accomplished by the Executive executing a new Deferral Agreement in
accordance with rules adopted by the Company. Any modification of the Deferred
Amount shall have prospective effect only and shall not apply to any bonus
and/or comissions not yet paid, but already earned and irrevocably owed by the
Company to the Executive. The Company shall have no obligation to accept any
modification of the Deferred Amount unless the Executive complies with the
requirements of the Plan and the rules adopted by Company to carry out this
provision. If the Executive fails to modify or terminate deferrals in accordance
with the Plan or the Company rules, then deferrals will continue at the existing
rate.
-4-
6. Investment Model. The Company, at its sole discretion, shall identify
one or more investment options which may be made available for selection by the
Executive. The investment options selected by the Executive shall constitute the
Investment Model for that Executive under this Plan. Investment options may
include all investments and funds available in the marketplace for self-directed
accounts in retirement plans, and in the Company"s sole discretion may include
securities of the Company. At any time and from time to time the Company shall
have the right, in its sole discretion, to change, modify or discontinue the
availability of any investment option it has selected for possible inclusion in
the Executive"s Investment Model. Pursuant to rules adopted by the Company, the
Executive shall be entitled to select and change the investment options in his
or her Investment Model. At all times the Executive"s Investment Model shall be
basis by which Income attributable to his/her Deferred Compensation Account is
measured. The Executive shall be provided from time to time with the investment
"results" of his or her selected Investment Model. The Company's liability to
the Executive for amounts in the Deferred Compensation Account includes Income
attributed to the Investment Models selected by the Executive.
7. The Deferred Compensation Account. The balance of the Deferred
Compensation Account, including all Deferred Amounts and all Income attributed
to the Deferred Compensation Account, shall be subject to the following
conditions:
a. Unsecured liability. A Deferred Compensation Account shall
represent an unsecured liability of the Company.
b. Prohibition against set aside. The Company shall not permit or
cause any amount equal to the balance of a Deferred Compensation Account to be
set aside or placed in a trust account or escrow account for the benefit of the
Executive. Title to and beneficial ownership of any assets and income
-5-
attributable thereto that the Company may, for its own purposes, earmark to pay
the balance of a Deferred Compensation Account, shall at all times remain in the
name of the Company and shall be subject to the claims of the general creditors
of the Company. However, the Company may, at its option, and in its sole
discretion establish a Trust for the purpose of holding assets set aside to
satisfy its liabilities pursuant to a Deferred Compensation Account. If the
Company establishes a Trust, the Company may also determine the amounts it deems
necessary or appropriate to fund the Company"s obligation to pay the Deferred
Compensation Account and forward such amounts to be held in Trust by a trustee
selected by the Company. All amounts in the Trust shall be earmarked to pay
benefits under the terms of the Plan. The Company will direct the trustee to
make periodic distributions from the Trust at such times and in such amounts as
the Company deems appropriate.
If a Trust is established, Trust assets cannot be diverted to, or
used for, any purpose except payments to Participants and Beneficiaries under
the terms of the Plan or, if the Company is insolvent (as defined in the Trust),
to pay the Company's creditors. Participants and Beneficiaries will have no
right against the Company with respect to the payment of any portion of the
Participant's Deferred Compensation Account, except as a general unsecured
creditor of the Company.
c. Property interest of Executive. Neither the Executive nor his
or her Beneficiaries shall have or acquire any property interest whatsoever in
any specific assets or income of the Company pursuant to the Plan, except to the
extent necessary to enforce payment of a Deferred Compensation Account pursuant
to Section 9 of the Plan.
-6-
d. Prohibition against use as collateral or assignment. The
Executive shall have no right, power or privilege to use any portion of a
Deferred Compensation Account as security or collateral for a loan from the
Company or any other person, nor may the Executive assign or pledge the right to
receive any future payments from a Deferred Compensation Account. Moreover, the
Executive shall have no right to transfer, modify, anticipate, or encumber any
benefits or rights hereunder, and neither the Deferred Compensation Account nor
any payment that may be due and owing the Executive hereunder shall be subject
to execution, attachment or other court process or shall be transferable by
operation of law in the event the Executive becomes insolvent or bankrupt or for
any other reason.
e. Status of Deferred Compensation Account. The Deferred
Compensation Account and Income shall remain the sole, exclusive property of the
Company (until payable to the Executive) under the terms and conditions of the
Plan without any restriction or limitation on its use by the Company, subject
only to the claims of the Company's general creditors and to restrictions
contained in any Trust Agreement that the Company may establish.
8. Company Match. The Company may, at its sole option and discretion,
announce a prospective match for amounts deferred by an Executive. The match may
based on any formula the Company in its sole discretion chooses. The match will
be deemed contributed to the Executive"s Deferred Compensation Account and
treated as additional Income to the Deferred Compensation Account. The match and
any Income attributable thereto under the Executive"s Investment Model shall be
deemed "Match Funds." Any Match Funds shall be subject to the other provisions
of the Plan including the non-competition provisions of Section 15.
9. Events Triggering Payment of Deferred Compensation. The Executive
shall not receive, nor be entitled to receive, any payment from his or her
Deferred Compensation Account as long as the Executive remains employed by the
-7-
Company or a subsidiary of the Company, unless specifically provided in this
Section. The Executive shall be deemed to be employed so long as the Executive
continues to provide personal services to the Company or a subsidiary under a
current employment arrangement and no separation from service with the Company
(whether due to the voluntary or involuntary resignation or discharge of the
Executive from his/her position with the Company or his/her death, retirement,
failure to return to active work at the end of an authorized leave of absence or
the authorized extension(s) thereof, or the happening of any other event or
circumstance which, under the then current policy of the Company results in the
cessation of the employer-employee relationship) has occurred. Termination from
employment shall not be deemed to occur merely because of a transfer between the
Company and any subsidiary thereof.
a. Distribution Following Termination of Employment. The
Executive or his or her Beneficiary shall be entitled to payment of his or her
Deferred Compensation Account in the manner selected by the Executive upon
termination of employment with the Company, including a termination which occurs
because of:
1. the Executive's disability (as defined hereafter)
or death; or
2. retirement of the Executive after having attained
age 65.
b. Distribution Prior to Termination of Employment. The
Executive shall be entitled to payment of his or her Deferred Compensation
Account in the manner selected by the Executive prior to termination of
employment with the Company upon the occurrence of any of the following:
1. attainment of an "elected age," which is the age
selected by the Executive in his or her most recent Deferral Agreement to begin
receiving the amounts in the Deferred Compensation Account. The "elected age"
must have been selected by the Executive at the time he/she executed the
-8-
Deferral Agreement, which must be at least twelve (12) months prior to the time
he/she would be otherwise entitled to any payment under this Section. The
election must be pursuant to rules adopted by the Company.
2. occurrence of a "hardship," as defined in this
Section. All deferrals by the Executive for the twelve (12) month period
following a hardship distribution shall cease in the event the Company approves
a request of the Executive for a hardship distribution.
3. an early distribution election made by the
Executive and approved by the Company. An Executive shall be entitled to receive
an early distribution from from his/her Deferred Compensation Account at any
time (an "Unscheduled Distribution"), subject to all of the following rules and
limitations:
A. An Executive may receive no more than one
(1) Unscheduled Distribution in any calendar year.
B. The Unscheduled Distribution amount shall
not include any amounts deferred by the Executive during
the same calendar year in which the Unscheduled
Distribution occurs.
C. The Unscheduled Distribution amount shall
equal ninety percent (90%) of the amount requested by the
Executive. The remaining ten percent (10%) of the amount
requested shall be permanently forfeited from the
Executive"s Deferred Compensation Account at the time the
Unscheduled Distribution is made and shall no longer be
available for distribution to the Executive from the Plan.
D. The Executive shall not be permitted to make
further deferrals to the Plan prior to the expiration of
-9-
twelve (12) months from the date of the Unscheduled
Distribution. Following the twelve month period the
Executive shall be treated as newly eligible under the
Plan and may execute a new Deferral Agreement.
c. Disability. The Executive shall be deemed to have become
disabled for purposes of Section 9.a.1. above if the Company shall find on the
basis of medical evidence satisfactory to the Company that the Executive is
physically or mentally impaired; that as a result of such impairment the
Executive is unable to discharge his/her assigned duties with the Company; and
that such impairment is expected to result in death or to continue for a lengthy
and indefinite period. The Company, in its sole discretion, shall make the
determination of disability. Notwithstanding the foregoing, a Executive who is
eligible to receive Social Security disability payments shall be deemed to be
disabled without further proof.
d. Hardship. The Executive shall incur a hardship if the
Executive suffers an unforeseeable and unanticipated emergency which is caused
by an event beyond the control of the Executive and which would result in severe
financial hardship to the Executive if a distribution or revocation of a
deferral election were not permitted. Hardship conditions will be evaluated in
accordance with the terms of Treasury Regulations "1.457-2(h)(4). The Company
will have sole discretion to determine whether a Hardship condition exists and
the Company"s determination will be final.
An Executive must submit a written request for a hardship
distribution to the Company on the form and in the manner prescribed by the
Company. The hardship request must: (i) describe and certify the hardship
condition and the severe financial need; and (ii) state the amount the Executive
proposes to withdraw from his/her Deferred Compensation Account to meet the
-10-
severe financial need. The Company will have the sole discretion to determine
whether a hardship exists and to determine the appropriate action, if any,
provided however, in no event will the Company approve a hardship distribution
in excess of the amount necessary to satisfy the immediate hardship need.
e. Payment upon death of the executive. If the Executive should
die prior to the time that payment of a Deferred Compensation Account to the
Executive has commenced, then the Company shall pay the amount in the Deferred
Compensation Account in the manner previously selected by the Executive to the
Executive's Beneficiary. If the Executive should die after payment from the
Deferred Compensation Account has commenced, payments will continue in the
manner previously selected by the Executive. If the Executive's named
Beneficiary is deceased, then the balance of the Deferred Compensation Account
shall be paid as provided in Section 1.a.
10. Method of Payment of Deferred Compensation Account. At the time the
Executive executes his/her Deferral Agreement, the Executive shall elect the
method of payment of the Executive's Deferred Compensation Account. The
Executive may select a different method of payment which is permitted under this
Plan by executing a new Deferred Compensation Agreement, or by executing any
other form provided by the Company for this purpose. The new method of
distribution shall not be valid or binding on the Plan unless it has been
selected by the Executive at least twelve (12) months prior to the time he/she
would be otherwise entitled to any payment under the Plan.
a. Method of Payment. The Executive may choose (1) a lump sum
payment; (2) equal monthly payments for 60 months; (3) a combination of lump sum
and a 60 or 120 equal monthly payments, or (4) equal monthly payments for 120
months.
b. Default Election. The Executive shall elect and deliver to the
Company his/her election of method of payment consistent with this Plan and in
accordance with procedures adopted by Company. An election will not be effective
-11-
until received by the Company. In the event the Executive fails to make an
election or no valid election exists at the time payment is to commence, his/her
Deferred Compensation Account will be paid in equal monthly payments for 60
months.
c. Income. In the event the Executive selects a method of payment
other than lump sum, the amounts remaining in his/her Deferred Compensation
Account shall be adjusted for Income attributed to the Investment Model selected
by the Executive. In the event of the Executive's death or inability to select
an Investment Model during the period in which payments are being made, the last
Investment Model selected by the Executive shall control.
11. Payments to Other Persons. The Company shall only be required to pay
amounts due under the Plan to the Executive, Beneficiary or other legal
representative of the foregoing (custodian, personal representative, guardian,
trustee etc.)
12. Other Benefits Determined by Compensation. Deferred Amounts credited
to the Deferred Compensation Account under the Plan shall not be deemed to be
part of the Executive's regular annual compensation for the purpose of computing
benefits to which he or she may be entitled under any qualified pension, profit
sharing or 401(k) plan, or other arrangement of the Company for the benefit of
its employees.
13. References to the Company. The Company shall have full power and
authority to interpret, construe and administer the Plan and the Deferral
Agreement. The Company's interpretations and construction of these agreements
and actions under these agreements shall be binding and conclusive on all
persons for all purposes. No employee, representative or agent of the Company
shall be liable to any person for any action taken or omitted in connection with
the interpretation or administration of the Plan or the Deferral Agreement
unless attributable to his or her own willful misconduct or lack of good faith.
-12-
14. Claims Procedure.
a. Initial Claim. Should the Executive or any Beneficiary fail to
receive any amount to which the Executive or Beneficiary ("claimant") believes
he/she is entitled, a claim may be filed. A claim for benefits shall be filed by
the claimant by written communication that is made by the claimant or the
claimant's authorized representative that is reasonably calculated to bring the
claim to the attention of the Company.
If a claim is wholly or partially denied, a written notice of the
decision shall be furnished to the claimant by the Company or its designee no
more than ninety (90) days after receipt of the claim, which notice shall
include the following information:
1. The specific reason or reasons for the denial;
2. Specific reference to the pertinent provisions of
the Plan upon which the denial is based;
3. A description of any additional material or
information necessary for the claimant to perfect the claim and
an explanation of why such material or information is necessary;
and
4. An explanation of the claim review procedures as
outlined in the Plan.
b. Claim Appeal. In order that a claimant may appeal a denial
of a claim, a claimant or his duly authorized representative:
1. may request a review by written application
submitted to the Company or its designee not later than 60 days
after receipt by the claimant of written notification of denial
of a claim;
2. may review pertinent documents; and
3. may submit issues and comments in writing.
-13-
A decision on review of a denied claim shall be made not later than 60
days after receipt of a request for review, unless special circumstances require
an extension of time for processing, in which case a decision shall be rendered
within a reasonable period of time, but not later than 120 days after receipt of
a request for review. The decision on review shall be in writing and shall
include the specific reason(s) for the decision and the specific reference(s) to
the pertinent provisions of the Plan on which the decision is based.
15. Non-Competition. In order to be eligible for payment of any amounts
from an Executive"s Deferred Compensation Account of Match Funds, a Terminated
Executive must not compete or engage in competition with the Company.
"Terminated Executive" means an Executive who has terminated his/her employment
with the Company for any reason. If a Terminated Executive complies with this
Section, a terminated Executive shall be deemed to have complied with
non-competition requirements of the Plan.
a. A Terminated Executive shall not and will use his/her best
efforts to ensure that agents or others under his/her control do not, disclose
the Company's proprietary and confidential information to any person or entity,
unless the information has been made public or has been made generally available
otherwise than by such Terminated Executive"s breach of his duties under the
Plan or such proprietary or confidential information is otherwise no longer
confidential or proprietary. Confidential or proprietary information shall mean
confidential aspects of the Company"s relationship with its customers; Company
files, records, reports, information systems and other information that it deems
to be proprietary and confidential including, but not limited to, information
concerning finance, manufacturing, business strategy and plans, marketing,
profit margins, pricing, management information systems and computer programs,
and trade secrets.
-14-
b. The Terminated Executive shall not seek to hire or directly or
indirectly solicit any employee to terminate such employee's employment with the
Company or assist any other person or entity in attempting to hire or hiring any
employee of the Company; or
c. The Terminated Executive shall not interfere with or impede
Company's relationships with customers, suppliers or vendors, lending
institutions, lessors and governmental entities; or
d. For a period of two years from the date of his/her
termination, the Terminated Executive shall not enter into or join a competing
business, or endeavor as an employee individual, partner, joint venturer,
independent contractor, officer or director that would directly or indirectly
compete with the Company within 150 miles of the Company offices in Utah, or in
any other state or country in which the Company has an office.
e. In the event of litigation of any breach of this Section 15 by
a Terminated Executive, the two year time period shall be tolled, except that if
following termination, the Terminated Executive does not engage in the
activities proscribed in this Section 15, no tolling shall occur.
f. In the event of breach of the non competition provisions of
this Section 15, then the Terminated Executive shall forfeit all right title and
interest to any Match Funds that he/she may have.
16. Disclaimer. The Company intends that the Plan, together with the
Deferral Agreement, shall establish a plan deferred of compensation. However,
the Company makes no representation or warranty of any nature or kind whatever
relative to the binding nature of the Plan (except as regards the Company's
obligations specified hereunder) with respect to any law, statute, rule,
-15-
regulation, decree or like determination and, specifically, without limitation,
the Company disclaims any warranty or representation regarding the validity of
the Plan or the purpose intended hereunder with regard to any section of any tax
code, law, regulation, ruling, statute or decree of any taxing entity of the
United States Government or of any of its individual states (including the
District of Columbia) or subdivisions thereof.
17. Binding Agreement. The Plan shall be a binding agreement upon and
inure to the benefit of the Company, its successors and assigns and, upon
adoption by the Executive through execution of a Deferral Agreement, the Plan
shall be a binding agreement upon the Executive and his/her Beneficiaries,
heirs, executors, administrators and legal representatives.
18. Applicable Law. The Plan shall be construed in accordance with and
governed by applicable federal laws and the laws of Utah.
IN WITNESS WHEREOF, the Company has executed the Plan effective as of
the date written above.
"COMPANY"
Merit Medical Systems, Inc.
By
----------------------------------
Title
-------------------------------
-16-
2000
ANNUAL
REPORT
MERIT MEDICAL SYSTEMS, INC.
Table of Contents
- -----------------
Presidents's Letter
Products & Technology
Management's Discussion & Analysis
Financial Information
Corporate Information
Year Ended December 3 1 ,
- ---------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
Operating Data:
Net Sales $91,477,512 $77,959,576 $68,377,357 $60,579,011 $50,455,766
Gross profit 30,624,053 30,041,761 25,943,484 22,812,895 21,136,149
Income before income taxes 773,845 4,761,429 4,290,346 1,775,516 3,630,152
Net income 826,557 3,225,590 2,451,159 797,532 2,162,608
Net income per share $0.11 $0.43 $0.33 $0.11 $0.31
Weighted average shares
outstanding (diluted) 7,860,905 7,565,673 7,488,225 7,369,668 7,051,911
Balance Sheet Data:
Working capital $32,447,007 $33,933,698 $15,779,725 $14,737,971 $12,761,211
Total assets 71,446,631 72,360,469 50,664,786 45,269,678 41,718,553
Long-term debt 24,011,778 27,817,308 3,388,835 3,913,686 4,822,126
Stockholders' equity $34,772,702 $32,690,136 $29,086,368 $25,802,149 $22,487,123
ABOUT THE COVER
Merit Medical has emerged from a difficult year in 2000 into a very bright
positive operating and safe environment. Small-cap health care stocks appear to
be favorably positioned as an anti-recession vehicle.
Corporate Headquarters
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
801-253-1600
www.merit.com
PRESIDENT'S LETTER
Dear Fellow Shareholders:
2000 was the worst of times and it was the best of times. I could spend
a great deal of time in this report analyzing our lower results, but I think we
have done that sufficiently during the year. As discussed in our conference
calls, news releases and quarterly reports, our expectations for sales were too
high, we built too much inventory, and we were too highly staffed, which created
operating inefficiencies. Indeed, our revenues experienced a 17 percent gain to
$91.45 million in 2000 from $77.96 million in 1999, and we saw good growth in
several of our product lines. These included inflation devices, which grew by 7
percent; catheters, which grew by 174 percent; and stand-alone products (those
not sold in kits), which grew by 24 percent.
The costs associated with higher inventories, including debt service
and inventory management issues, resulted in much lower profits for Merit. In
addition, one of our large customers ceased business operations, resulting in a
charge to our operating income of $340,000, or $0.03 per share. Net income was
$827,000, or $0.11 per share, compared with $3.23 million, or $0.43 per share in
1999. With these results behind us, I would like to focus on the future and what
we are doing to bring value to our shareholders. We have spent the entire year
improving efficiencies in operations while continuing to develop differentiating
products and build sustainable competitive advantages in each of our product
groups. These improvements are resulting in the dawn of a very successful year
for Merit in 2001.
REDEFINING OUR BUSINESS
We made tremendous progress in re-evaluating and improving the
processes by which we conduct our business-including labor, overhead and
materials. Each one of these three broad categories of business management was
redefined within the meaning of Merit's corporate philosophy and modified from
the top down. In the first quarter of 2000, we began to make changes in our
manufacturing processes. Since that time, we have adopted an automated packaging
process, standardized our labeling, re-evaluated our packaging materials, and
increased the efficiencies of product flow between facilities. In addition, in
order to help drive efficiencies going forward, we have adopted a new,
goal-oriented employee compensation plan based on performance and cost-saving
achievement.
1
INCREASED PRODUCTIVITY
Within the labor and overhead categories, it was determined that in
order to rapidly reduce inventories, product had to be built at a pace slower
than sales, which required a lower headcount. Therefore, we chose not to replace
hourly staff as they left the Company for other opportunities. In addition, in
June of last year, we made a decision to formally reduce our staff by 23 people,
mostly from middle management, which on an annualized basis will save Merit over
$1 million in labor and overhead costs each year.
The result of this gradual reduction in our workforce throughout the
year was a headcount of 1030 at the end of 2000 compared with 1270 in December
1999. Averaging the headcount over the year, the net reduction was 100 fewer
people than in 1999, which yielded a direct-labor and overhead savings of
approximately $1.4 million. We accomplished this staff reduction while sales
increased by 17%.
This gradual slowing in our workforce numbers also coincided with a
drop in inventory by year's end of approximately $2.3 million, and $1.3 million
of that was accomplished in the fourth quarter. Along with inventory reductions,
inventory turns have begun to increase from 2.1 times in 1999 to 2.3 times in
2000. It is our goal this year to increase inventory turns to at least 2.7.
Once we began to see in the third quarter that our efforts in labor and
overhead were beginning to produce results, we turned our attention to the ways
in which raw materials were purchased and our products distributed. First of
all, we decided to change our approach to the Canadian marketplace, which
operates within a national health care system, and we secured the services of a
distributor rather than using direct sales representatives. This decision began
to yield immediate rewards that have continued through the beginning of 2001. We
have also greatly strengthened our commitment to support and train not only our
domestic sales force but the international sales force and worldwide
distributors as well. This increased effort should reward us with increased
sales of our products going forward.
2
Another area of emphasis is the renegotiation of contracts for raw
materials purchases. Due to continued pricing pressure on its products, Merit is
developing new partnerships with its vendors to reduce costs and implement
just-in-time raw material deliveries. This program already is underway and is
beginning to show rewards.
OTHER COST-CUTTING MEASURES
A close scrutiny of our entire organization has yielded many areas for
potential cost reduction. For example, even this annual report was produced
differently, saving over $5,000 from last year. Last year as a result of lower
inventory and other cost-related savings, we were able to reduce debt
substantially, particularly in the fourth quarter. We made considerable progress
in this regard in 2000, and particularly in the fourth quarter. As of December
31, 2000, the Company had reduced its long-term debt to $24 million from $31
million in August 2000. Since the beginning of 2001, long-term debt has been
reduced by an additional $4 million. Merit's strategy to reduce long-term debt
will result in less business risk, increased available capital for growth, and
lower interest costs. It is our strategy to continue to reduce our debt, which
will have an immediate and long-lasting impact on the value of the company.
ALLIANCES AND PARTNERSHIPS
We are conducting our business in a highly competitive arena,
particularly in terms of pricing. Device manufacturers have continued to
experience pressure from managed care buying groups to reduce prices, while
attempting to maintain margins. Changes we made last year such as greater
efficiencies in manufacturing, materials purchasing and handling, and reductions
in inventory and headcount will have a positive impact on our financial results
in 2001. We believe that substantial annual savings are still available in the
cost-of-sales area, which will help continue to increase our gross margins.
Last year we also made some new product decisions that should be of
tremendous value going forward. During the year we took on a distribution
agreement for the PercuStay(R), a drainage catheter fastening device; and we
signed licensing agreements on the Arrowood patent for a radial artery
compression device and with Specialized Medical to manufacture and market a
safety needle. We are one of only a few companies that will offer a needle with
safety features to prevent inadvertent needle punctures, which was mandated in
November 2000 by the Needlestick Safety and Prevention Act.
In addition to new distribution and development agreements, we
introduced several new products that add to Merit's offering: a complete line of
vessel-sizing catheters used in radiology procedures to repair damaged arteries
3
and veins; an 8ml syringe for contrast media injection; a new hemostasis valve,
the Inspector(R); the ShortStop(R), a temporary sharps holder; and our new DeVos
manifold with a proprietary, integral flow-control valve. Sales of these
products did well and helped provide us with the solid revenue growth we
sustained during the year, particularly the new vessel-sizing catheters, which
are discussed in the Product and Technology section.
We have accomplished all the above in a marketplace that has
accelerated its demands for cost cutting and productivity, while that market is
growing only by modest, single-digit rates. Merit has built an outstanding
reputation with its customers, based on quality products and customer service
that benefit the treatment of patients. With new, innovative products in
development, we believe we are addressing both physician and patient needs in an
ever-changing environment.
To this point, value to the shareholders has been missing at the level
we believe is possible. However, we beleive that our projects this year, as well
as all the internal improvements we have made, will yield outstanding value in
terms of financial performance. Already, as I write this letter to you, we are
for the first few months of the year consistently ahead of plan, which bodes
well for the prospects of this year. We can't anticipate every problem; however,
the momentum we are gaining should be more than sufficient to overcome most
obstacles. Merit is a much stronger, leaner company than it was last year at
this time, and we are still making adjustments to all areas of our corporate
structure as the need arises.
The future for Merit Medical is bright. Many opportunities for growth
exist despite adverse conditions in the marketplace. It was an unfortunate year;
but looking forward, I believe we will be able to say in the next year's annual
report that it was a good year. I sincerely appreciate the faith, patience and
loyalty you, as shareholders, have had in Merit these last several years. It is
with great enthusiasm that our entire organization and I look forward to
bringing Merit to its full potential in 2001.
Best personal regards,
/s/ Fred P. Lampropoulos
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Fred P. Lampropoulos
Chairman and Chief Executive Officer
4
PRODUCTS AND TECHNOLOGY
DIAGNOSTIC CATHETERS
Merit Medical has completed its first full year of marketing the line
of diagnostic radiology and cardiology catheters it acquired from Mallinckrodt
Inc. in mid-1999. These types of catheters are used by hospitals worldwide to
perform angiograms. There are approximately 8 million of these essential
procedures performed each year worldwide, representing a market of approximately
$7 billion. Diagnostic angiography catheters continue to be the tool most widely
used by physicians in the diagnosis of patients with vascular disease.
An angiogram involves the injection of radiopaque fluid, or contrast
media, into a patient's artery or vein. A picture from an X-ray machine called a
fluoroscope is taken of a location within the blood vessel, and a skilled
physician then can determine the nature, severity and precise location of plaque
deposits, blockages, aneurysms, and other abnormalities.
The standard method for inserting these long, thin catheters has been
through a puncture made in the patient's femoral artery, located in the groin
area. The catheter is threaded up through the vascular system to either the
heart or another area of the body. Within the last few years an insertion
technique through the radial artery in the wrist has become more popular. This
is because the opening made is much smaller and therefore easier to close,
resulting in less blood loss, shorter hospital stay and faster recovery time for
the patient. As an adjunct to the radial procedure, last year Merit secured the
licensing rights for a new product, the RadStat(R), a radial artery compression
device. Market research tests of the RadStat have provided positive feedback in
terms of stopping bleeding from the wound after the procedure. The RadStat was
introduced in early 2001. With margins substantially above corporate averages,
this new product should be a solid contributor to corporate profits.
The acquisition of the diagnostic catheter line enables Merit to expand
its capabilities and technological know-how for catheter-related projects such
as extrusion, tipping, catheter coating, wire braiding, and other technologies.
Areas where the Company has utilized this new technology include pigtail
angiography catheters for both adults and infants; pericardiocentesis catheters,
which drain excess fluid from around a patient's heart; vessel-sizing catheters,
which help physicians diagnose and repair damaged blood vessels; and drainage
catheters.
5
Merit's sales of its diagnostic catheters have been encouraging this
last year. In this competitive market, Merit has deemed it necessary to improve
the quality of this product line in order to grow its business. A substantial
portion of Merit's research and development efforts this past year have been
focused on these improvements, which should appear in the marketplace sometime
in mid-2001. All of Merit's know-how, together with its already substantial
abilities in catheter-related areas, is being combined into a new Center of
Excellence for catheter technology located in our Angleton, Texas facility. We
expect this will result in greater manufacturing efficiencies and higher
corporate profits.
VESSEL-SIZING CATHETERS
Leveraging off its catheter expertise, last year Merit Medical launched
a new line of catheters used to measure the internal diameter and length of
either an artery or vein. Vessel-sizing catheters are used in a variety of
procedures, including angioplasty, embolization, abdominal aortic aneurysm (AAA)
grafts, and vena cava filter placements. It is estimated that the worldwide
market potential for these catheters is in excess of $5 million per year, and
growing rapidly.
These catheters have special marker bands that are spaced at a known
distance apart to enable physicians to calculate the vessel size. With this
critical information, the physician can determine what size of vascular graft,
venous filter or other treatment is needed. A precise measurement is necessary
in order that the graft or filter fits well to prevent migration toward the
heart or into other areas of the body.
The AAA stent-graft market is growing very rapidly, due primarily to
the September 1999 approval of this minimally invasive procedure by the U.S.
Food & Drug Administration. In the fourth quarter, Merit introduced its new
20-band vessel-sizing catheter used specifically for measuring the aorta during
a AAA stent-graft procedure. IMS sales data suggests that Merit is now the
market leader in the 20-band catheter market used primarily for the AAA
stent-graft procedure. The 20-band catheter has decided advantages over other
catheters, such as its high radiopacity, making it easier to see under
fluoroscopy, a very smooth transition from the catheter body to the platinum
bands, as well as a highly kink-resistant catheter body.
6
Prior to approval for this procedure, physicians had to perform
open-abdominal surgery to remove a section of the diseased artery and replace it
with a man-made graft. Today, physicians can insert a catheter through an artery
or vein and measure it, insert a stent-graft or filter, deploy the device, and
withdraw the catheter. Following a closure procedure, the patient usually
recovers within a few days, rather than a few weeks.
DIGITAL INFLATION TECHNOLOGY
Merit believes in product innovations that contribute to the
physician's skill and improve clinical outcome. Innovation and new technology
adds to existing clinical potential, and expands it into new dimensions once
thought impossible. Last year, Merit introduced a new standard in digital
technology with the IntelliSystem(R) II monitor, inflation devices and
accessories.
There are approximately 2 million angioplasty and stent placement
procedures performed each year worldwide. Merit has achieved and sustained a
world market leadership in balloon inflation devices and accessories for
angioplasty and stent placement by adapting its technology to physician demand.
In order to continue the growth of Merit's core inflation business, it developed
a more sophisticated, digital technology for measuring inflation pressures.
The patented IntelliSystem II color monitor is the most advanced on the
market and gives physicians several highly desirable options. For example, its
large touch screen and display readout make it possible for everyone in the
clinical setting to know at a glance how the patient is responding to the
procedure. The screen also instantly displays positive or negative pressure by
changing color, and the user can choose to enlarge the graphing capability to
observe extremely subtle changes in pressure measurements. The IntelliSystem II
enhances global flexibility by enabling the user to manually select the monitor
to display in four different languages.
As the product life cycle for the inflation device has matured, this
highly sensitive display monitor has enhanced sales by opening up new realms of
use by physicians. For example, in 1999 physicians in pain clinics began using
Merit's inflation devices for a diagnostic spinal procedure called discography,
causing sales for inflation devices used in discography to double from 1999 to
2000. In addition, other physicians use Merit's inflation device to inflate and
measure pressure in a tiny balloon to treat a painful facial disorder called
trigeminal nerve compression.
7
Merit is the only company that has digital technology sensitive enough
to show the minute changes going on in these procedures. Merit's sales of
inflation devices have grown steadily over the last two years due to expanded
physician acceptance and use. The increased use of drug-coated stents to reduce
restenosis (re-closure of the artery) is also contributing to growth rates for
Merit's digital technology.
SAFETY PRODUCTS
Merit Medical is committed to improving safety in the clinical setting
by designing medical products that minimize errors and the exposure of
healthcare workers to "sharps" (needles, scalpels and other sharp tools), and
the associated vulnerability to blood and blood-borne pathogens. Syringes and
needles need to be handled with extreme caution to avoid accidental skin
puncture, aerosol generation, or inadvertent medication errors.
In the past few years as the awareness of the potential danger of
blood-borne pathogens and the safety of both clinicians and patients has become
more apparent, Merit Medical has responded to customer needs by launching new
products that address specific safety concerns. Merit's safety products have
experienced double-digit sales growth over the past year, confirming customer
acceptance.
SAFETY NEEDLE
In November 1999, OSHA issued a compliance directive that "mandates the
use of safer medical devices to help reduce needle sticks and other sharps
injuries." The Needle Stick Safety and Prevention Act was passed unanimously by
Congress and signed by President Clinton on November 6, 2000 (published in the
Federal Register in January 2001, and effective April 2001). As mandated by this
Act, OSHA has revised its blood-borne pathogens standard to clarify the need for
employers to select safer needle devices as they become available and to involve
employees in identifying and choosing the devices.
In the first quarter of 2001, Merit signed an exclusive worldwide
agreement with Specialized Health Products to manufacture and sell safety needle
devices for angiographic guide wire introducers. The new safety needles are
being developed in response to the Needlestick Safety and Prevention Act. There
8
are more than 5 million unprotected angiography needles used in the United
States each year and approximately 5 million more for the rest of the world.
Merit believes the new safety device will more than double the volume of its
needle sales.
ShortStop(R) Temporary Sharps Container
The ShortStop is a small, adhesive-based container that fits
unobtrusively on the back table in a clinical lab. It is used for the temporary
containment of needles and other sharps and provides a viable alternative to
minimize the potential of inadvertent needle sticks. Merit's sales of this
device grew 45 percent in 2000.
MEDALLION: COLOR-CODED AND PRINTED SYRINGE
In response to the growing concern of medication errors, one of the
first products Merit introduced was the Medallion color-coded syringe. These
perfectly clear, colorful syringes have the name of the medication printed on
the barrel to minimize medication errors in the clinical setting. Additionally,
physicians can color-code their medications to further prevent medication
errors. The Merit Medallion syringe is a cost-effective product for those health
care workers who value safety. Merit's sales of this syringe grew by 14 percent
in 2000.
MERIT DISPOSAL DEPOT (MDD): CLOSED-WASTE MANAGEMENT SYSTEM
Merit's disposal depots are totally closed-fluid systems that transport
waste away from the patient procedure in a safe, convenient way. OSHA's
"Occupational Exposure to Blood-Borne Pathogens Standard" was designed to
protect approximately 6 million workers in the health care and related fields
from the risk of exposure to blood-borne pathogens, such as HIV and hepatitis.
Handling and manipulation of blood and other biological fluids requires the use
of precautionary measures. The MDD closed-waste system is a cost-effective,
simple way to satisfy OSHA guidelines in managing blood waste. Sales of this
product grew 10 percent in 2000.
BACKSTOP: COVERED WASTE BASIN
An additional OSHA standard states, "All procedures involving
infectious material shall be performed in such a manner as to minimize
splashing, spraying and splattering of droplets of these substances." The unique
design of Merit's Backstop reduces the risk of blood splattering commonly seen
in traditional open bowls used on the back tables of radiology and cardiology
labs. Sales of the BackStop grew by 13% in 2000.
9
MBA HEMOSTASIS VALVE
In 1999 Merit introduced a unique hemostasis valve, the MBA, which
reduces blood loss to just a few drops during exchange of catheters, guide
wires, and other tools used during diagnostic and interventional procedures such
as angiography and angioplasty. Standard hemostasis valves, when opened to
insert a catheter or other instrument, allow free blood flow, causing occasional
severe patient blood loss and unnecessary exposure to blood-borne pathogens by
the clinicians. Introduced in 2000, the sales of Merit's MBA valve expanded on
an annualized basis by 83%.
DRAINAGE PRODUCTS
Leveraging off Merit's existing catheter technology and know-how, the
Company has been investing heavily the past year in a new line of drainage
products. In particular, Merit signed a licensing agreement with Derma Sciences
for the PercuStay and related catheter fastening devices which Merit introduced
in the third quarter of last year. The drainage line also includes the MDD
disposal bag that is discussed above in the Safety Products section, a 60cc
VacLok syringe, a large-bore stopcock and the flagship product, a line of
drainage catheters. Many of these products were introduced in 2000, while
others, like the catheter line, remain in the development cycle for introduction
later this year or 2002. These products address a market size of approximately
$90 million worldwide annually, and the catheter line should provide Merit with
considerable growth in the years ahead.
Merit's investments in new product development, product acquisitions
and licensing agreements have created a favorable opportunity for growth this
year and next. Merit is rapidly becoming the world leader in ancillary products
for diagnostic procedures in cardiology and radiology laboratories around the
country. The advent of new stenting techniques and the aging population will
continue to drive the sale of Merit's products in the years to come.
10
CORPORATE INFORMATION
EXECUTIVE OFFICERS ANNUAL MEETING All shareholders are invited
Fred P. Lampropoulos to offend our Annual Meeting on
Chairman, President/Chief Executive Officer Wednesday, May 23, 2001 at 3:00 p.m. at
the Company's corporate offices in South
Jordan, Utah.
Kent W. Stanger STOCK TRANSFER AGENT/REGISTRAR
Secretary-Treasurer, Chief Financial Officer Zions First National Bank
Stock Transfer Department
Leigh Weintraub P. 0. Box 30880
Chief Operating Officer Salt Lake City, Utah 84130
Brian L. Ferrand
Vice President, Sales
PRIMARY MARKET MAKERS
Sherwood Securities, Inc Dougherty & Co., Inc. Piper Jaffray Cos., Inc. Spear, Leeds & Kellogg
Knight Securities L.P. Wilson-Davis & Co., Inc.
BOARD OF DIRECTORS Dain Rauscher, Inc. Investec Ernst & Company
Schwab Capital Markets Olsen Payne & Company
Fred P. Lampropoulos Herzog, Heine, Geduld, Inc. Sutro & Co., Inc.
Chairman, President/Chief Executive Officer Sherwood Securities, Inc. Wien Securities Corp.
Kent W. Stanger MARKET INFORMATION The Company's common
Secretary-Treasurer, Chief Financial Officer stock is traded on the NASDAQ National
Market System under the symbol "MMSL" As of
Rex C. Bean, Private Investor December 31, 2000, there were 7,788,208
Ogden, Utah shares of common stock outstanding. The
following chart sets forth the high and
Richard W. Edelman low closing sale prices for the
Managing Director and Dallas Branch Manager Company's common stock for the last two years:
Sanders Morris Harris
Dallas, Texas
James J. Ellis, Managing Partner
EIlis/Rosier & Associates
Dallas, Texas
11
High Low
2000
Michael E. Stillabower, M.D. First Quarter $11.00 $6.69
Chief, Cardiology, Christiana Care Health Systems; Second Quarter 10.13 4.00
Member, Cardiology Consultants PA Third Quarter 6.88 5.38
Wilmington, Delaware Fourth Quarter 7.00 5.50
CORPORATE OFFICES 1999
Merit Medical Systems In First Quarter $ 6.88 5.00
1600 West Merit Parkwa Second Quarter 6.00 4.75
South Jordan, Utah 84095 Third Quarter 8.50 4.75
(801) 253-1600 Fourth Quarter 7.63 5.88
INDEPENDENT ACCOUNTANTS As of March 30, 2001, the Company had
Deloitte & Touche LLP approximately 200 shareholders of record,
Salt Lake City, Utah not including shareholders whose shares
are held in securities position
LEGAL COUNSEL listings.
Parr Waddoups Brown Gee & Loveless
Securities/General Counsel The Company has never declared or paid
Workman, Nydegger & Jensen any cash dividends on its common stock.
Patent Counsel The Company intends to retain any earnings
for use in its business and does not anticipate paying
FORM 10-K Merit Medical Systems, Inc. any cash dividends in the foreseeable future.
filed an annual report on Form 10K with
the Securities and Exchange Commission INVESTOR RELATIONS CONTACT Nancy Schultz,
for the fiscal year ended December 31, Director, Corporate Communications (801) 253-1600
2000. A copy may be obtained by written
request from Kent W. Stanger, Secretary, FOR MORE INFORMATION, CONTACT Kent W. Stanger, Chief
at the Company's offices. Financial Officer Merit Medical Systems, Inc. (801) 253-1600
12
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-48227, 33-46964, 33-10509, and 333-92053 of Merit Medical Systems, Inc. on
Form S-8 of our report dated February 23, 2001, appearing in this Annual Report
on Form 10-K of Merit Medical Systems, Inc. for the year ended December 31,
2000.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Merit Medical Systems, Inc.,
listed in Item 14. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
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DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 29, 2001